We’ve all heard the saying, “It’s better to be safe than sorry.” That is by far the best motto to live by when you start financially planning for retirement. Always be prepared for the unexpected to happen.
When it comes to things that we sometimes overlook when saving for retirement, healthcare costs are among the greatest oversights. Medicare is not free and healthcare costs tend to go up as we age. It’s important to pay careful attention to saving for future medical costs in your golden years.
Original Medicare and Costs
It’s very important to note that the FICA payroll taxes we pay while working for various employers throughout our careers only go to pay for one part of Medicare. Individuals who work at least 40 quarters during their lifetime will pay nothing for Part A hospital benefits when they retire.
However, we do not prepay for outpatient or drug expenses. When you retire, you will need to pay for Medicare Part B and Part D on a monthly basis.
Most people new to Medicare will pay $135.50 for Part B premiums in 2019. Part D premiums average around $35/month. Social Security will deduct your Part B premium from your Social Security check monthly and if you are unprepared for this, it can be quite a shock.
Furthermore, these parts of Medicare do not cover 100% of your healthcare costs. You will have to pay cost-sharing such as deductibles and copays as you use your benefits.
Although Medicare was designed to serve as a program to help seniors fund their medical expenses while on a fixed income, the program is not free and doesn’t cover 100% of your medical expenses, so you’ll need to have adequate savings for this.
Medicare Supplement and Medicare Advantage Plans
Although it’s not required to have a Medicare Supplement or Medicare Advantage plan, not having one can put your retirement savings at risk if you become chronically ill or experience any other kind of medical emergency. Since Original Medicare only covers 80% of your medical expenses, additional coverage such as a Supplement plan or an Advantage plan will help you cover the remaining 20% of medical expenses.
Now that you are aware that Original Medicare doesn’t cover all of your medical expenses and you will most likely need to enroll in a Supplement or Advantage plan, let’s explore the basics of what the plans are.
Medicare Advantage plans: These plans are private, network-based plans that you can enroll in instead of Original Medicare. If you go the Advantage plan route, your benefits will come strictly from the Advantage plan, not Medicare. You will agree to get your medical treatment from the plan’s network of medical providers except in cases of emergencies. You’ll have to pay copays for various medical services as you receive them.
- Usually, these plans have lower premiums than Supplement plans
- You must use the plan’s network providers to get your care on many plans
- Most Advantage plans include a Part D drug plan for your prescriptions
Medicare Supplement plans: Also known as Medigap plans, these plans pay as secondary insurance to Medicare. This means your supplement pays for some or all of the remainder of what Medicare doesn’t cover the bill. You stay enrolled in Medicare, and Medicare process and pays on your claims first. Then it sends any unpaid portion to your Medicare supplement insurer to pay its share.
- You are able to see any health provider that accepts Medicare – doesn’t matter which supplement company or plan you choose
- Retail drug coverage is separate
- Usually, have higher monthly premiums than Advantage plans
When it’s time for you to start thinking about how you are going to set yourself up financially for retirement, it’s crucial that you understand what Original Medicare will cover and if a Supplement plan versus an Advantage plan will better support your needs and budget.
The biggest mistake people make when they retire is assuming that Medicare is free and failing to enroll in additional coverage plans. Now that you know this, you can make a plan to save for your future medical expenses and to educate yourself on supplemental options so that you can choose the right coverage for yourself when the time comes.