Heading into retirement, it’s crucial to gain a comprehensive understanding of Medicare. Medicare often gets sidelined by financial advisors as it does not generate income in your retirement plan. However, at J.A. Lawrence Wealth Management, we firmly believe that having in-depth knowledge of our expenses is essential to successful retirement planning, with healthcare being a significant part of those expenses. Therefore, fully researching this subject is of paramount importance.
Medicare is a federal insurance program designed for elderly citizens. Throughout our working lives, we contribute to the Medicare system via the FICA tax. This tax is split into two sections: OASDI (Old age, survivor, disability, and insurance), which accounts for around 80% of the total FICA tax, and is often referred to as social security. The remaining 20% is the Hospital Insurance (HI), also known as Medicare part A.
There are four main components of Medicare: Part A, B, C, and D. Understanding each part is key to planning your health insurance strategy.
PART A: Commonly known as Hospital Insurance, it covers the costs of your hospital stay but not the physician’s fees. This insurance is funded by the FICA tax, and is generally available to everyone aged 65 and above. This is the minimum coverage you should sign up for, given you’ve been contributing to it all your working life.
PART B: This covers physician services including blood tests, equipment costs, home health care, and outpatient care. To put it simply, while Part A covers your admission into the hospital, Part B takes charge of the services provided within the hospital. This part is not covered by FICA and costs about $135 per month on average. However, if your adjusted income is above $170,000 a year when married, Part B can cost more. In my view, Part B is just as crucial as Part A.
Together, Medicare parts A&B, also known as original Medicare, make up 80% of the total Medicare, with Parts C and D constituting the remaining 20%.
PART C: This is the Medicare supplement that permits you to consult doctors/specialists for non-emergencies. This part includes Medigap and Medicare Advantage options.
MEDIGAP: Medigap insurance costs between $100 to $200 per month. Any physician who accepts Parts A and B also accepts Medigap. It’s vital to note that if you sign up for Medigap whilst enrolling in Parts A and B, you can qualify for Medigap- irrespective of age or health. If you refuse Medigap initially and instead opt for Medicare Advantage (that we’ll discuss further), you’ll need to be underwritten down the line. It’s also important to note that Medigap plans are sold through insurance companies and regardless of the provider, the coverage for each plan remains identical. So if one company charges more for a certain plan, it’s advisable to opt for a less expensive option with the exact same benefits.
MEDICARE ADVANTAGE: This is also run by insurance companies and works similar to private health care. It operates on a network basis, meaning if your geographical area falls within the network, this could be a good, less expensive alternative to Medigap. However, it’s important to remember that there are constant changes with Medicare Advantage policies which you must keep up with, especially in retirement.
PART D: This part covers prescription drugs. Some Medicare Advantage policies include Part D, but Medigap does not. Part D costs about $35 a month on average. If you opt for Medicare Advantage, it’s advisable to work through a broker rather than a captive agent due to the policy’s complexity and constant changes.
