How to Budget for the Costs of Medicare

The following is a guest post by Danielle K. Roberts, co-founder of Boomer Benefits, who’s an expert on Medicare costs and how to budget for Medicare costs. If you’d like to contribute a guest post to Money Q&A, be sure to check out the site’s guest posting guidelines.

Many people are unaware of just how much Medicare costs are until they turn 65 and are preparing to enroll. After all, we see during our working years that the federal government is deducting FICA taxes from our payroll checks, and we assume that means that one day Medicare will be free.

Unfortunately, that’s just not the case.

While your payroll taxes do help to fund your future Medicare Part A hospital premiums, they do not cover your Medicare Part B or D premiums. There are also costs which you will incur as you use your Medicare benefits. These come in the form of deductibles, coinsurance, and copays just like you have now.

So, how can you adequately prepare for the costs of healthcare in retirement? Let’s look at what costs you can expect and some savings tips for helping you accumulate these funds now for a future rainy day.

What You’ll Pay for Medicare

Most people won’t pay anything for Medicare Part A. As long as you or a spouse have worked 10 years during your lifetime and paid FICA taxes during those years, you won’t pay for Part A when you finally sign up for it.

Your Part B benefits, though, will require you to pay a monthly premium.

Your Medicare Part B benefits will provide for outpatient medical costs. This includes everything from preventive care and doctor visits to much more serious things like outpatient surgeries, chemotherapy, and dialysis. In 2019, the base premium for Part B is $135.50/month, and this is what most people pay.

Some people with higher incomes, though, will pay significantly more than this. You can find a chart on this page if you think that might include you.

Medicare also offers you the opportunity to enroll in voluntary drug benefits. You can do this by enrolling in a Part D drug plan with one of the insurance companies in your state that offers them. These range in premiums from around $15/month to well over $150/month depending on the plan, its benefits, and its drug formulary.

For budgeting purposes, the national average Part D premium is around $35/month. While this is an optional program, you’ll pay late penalties later on if you don’t enroll when you are first eligible unless you have other creditable drug coverage in the meantime.

So now you know that at a minimum, you’ll need $135.50 + $35 for your basic benefits, or around $170.50/month. Part B premiums tend to go up a bit each year as well, so you’ll need to account for inflation over your life expectancy.


Your Cost Sharing on Medicare

It would be lovely if Medicare covered 100% of all your health costs. However, Medicare doesn’t do this. Just like you have cost-sharing on your current under-65 health insurance, you’ll have cost-sharing as you use your Medicare benefits as well.

These come in the forms of deductibles, copays, and coinsurance on Medicare Parts A, B, D.

The most significant of these is the Part B coinsurance. On average, Medicare Part B covers only about 80% of your outpatient expenses, and you are responsible for the rest.

The best way to budget for these costs is to enroll in supplemental coverage that will cover these costs for you. There are 10 different Medicare supplement plans to choose from. Some cover all or nearly all of your cost-sharing and then there are some which cover only some of these costs but, of course, offer lower premiums instead.

Medicare Supplement prices vary widely based on your age, zip code, tobacco usage, gender and eligibility for a household discount. Prices also vary by region because the cost of healthcare in some areas is more expensive than others.

For example, here in Texas, you can get a pretty comprehensive Medicare supplement Plan G for around $100/month. That same policy might cost you more than twice that in Florida or Connecticut.

If your budget is limited, there is another alternative called Medicare Advantage plans. These plans have lower premiums because you agree to use a smaller local network of providers.

Plan to visit with your financial advisor or a Medicare insurance broker several years before you retire to check into the pricing in your area for plans that meet your needs.

A Great Way to Save for Healthcare Costs in Retirement

The more you save during your working years toward your retirement, the better, and this is certainly not news to you. However, you now also understand that at least some of your monthly Social Security income will need to go toward paying for Medicare and supplemental premiums.

One of the best vehicles for saving for future healthcare costs is the health savings account. If you are enrolled in a qualified high deductible health plan, you are eligible to open one. You can contribute money into this account year after year and the contributions are a write-off on your taxes. This money grows and compounds interest over time, and any withdrawals that are used to pay for qualified medical expenses are tax-free as well.

In 2019, you can contribute up to $3500 as an individual or up to $7000 as a couple. People aged 55 and older can also put in an extra $1000 per individual per year as a catch-up contribution. If you diligently save, you could enter retirement with literally tens of thousands of dollars to use for medical expenses in retirement. As of today, you can use those HSA dollars to pay for Medicare premiums, deductibles, copays, and coinsurance as well as dental, vision, hearing, and long-term care expenses which are not covered by Medicare at all.

Perhaps the best part about a health savings account is that people tend to think of it as a separate pool of money for medical expenses only. This means you are less likely to tap into it for other things.

No matter how you decide to save for retirement, be sure to keep healthcare costs in the picture so that you have enough money to meet your medical needs in the long run.

About the Author: Danielle K. Roberts is a Medicare expert with a journalism background focused on personal finance, member of the Forbes Finance Council and co-founder of Boomer Benefits located in Fort Worth, TX. Her award-winning agency is licensed and appointed in 48 states and has helped tens of thousands of Medicare beneficiaries understand their healthcare options in retirement since 2004. They were recently awarded the 2019 Health Insurance Advisory Firm of the Year Award by Finance Monthly.

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