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What does the number $491,039 mean to you? According to Jester Financial Retirement Health Care Cost Calculator, it is the amount the average 65 year-old couple today will pay, taking into account inflation, in health care costs during a 20-year retirement. Most people are aware that health care costs have been dramatically increasing for years, but estimating what the real cost will be for a retiree’s budget is somewhat overwhelming. With the growing uncertainty surrounding the US health care system and the growing US deficit, Medicare costs will more than likely continue to increase in the future. In order to combat the Medicare deficit, Obamacare has added additional premiums for high income earners. In this blog, we hope to shed some light on the specific changes coming to the Medicare system and discuss a few strategies to combat the ever increasing costs of health care in retirement.

Before we get into strategies, we first want to demonstrate what an average couple has to pay in medical expenses in retirement. Jon and Susy Smith are both 65 years-old and retiring this year. Their annual income in retirement is $115,000, which consists of pension income, including social security, and investment income. At 65, everyone is required to sign up for Medicare. Presently, there are no premiums charged for Medicare Part A, which covers hospital insurance, skilled care and hospice. There are deductibles that the Smith’s have to meet before the insurance kicks in, so they will likely incur out-of-pocket expenses to meet these deductibles. The premium for Medicare Part B, which covers doctors and outpatient care, is $104.90 per person per month or $1,258.8 per person per year. Part B also has a $147 annual deductible along with 20% coinsurance above the deductible amount with no limit. Because of this no limit 20% coinsurance, many people add a Medicare Supplement plan called “Medigap”. Medigap insurance is sold by third parties and the policies come in 10 standardized plans – A,B,C,D,F,G,K,L,M,N. All of these plans are a little different and the costs vary depending on what is covered. Plan F is the most comprehensive of all the plans and covers everything that Part B does not. Under Plan F, the Smith’s will pay the Medigap policy premium and nothing else. The cost of Medigap policy premiums depends on the carrier, but they typically range from $1,258-$4,028 per individual per year. The Smiths’ also will receive Medicare Part D coverage. Part D is prescription drug coverage offered by private insurance companies. Monthly premiums are based on the type of plan, but normally cost $30-$50 per month. Along with the premiums, there can be an annual deductible per person and there may be coinsurance and a coverage gap called the “doughnut hole”. When you add all of these expenses for the Smiths, they end up paying $6,328 per year for each individual – $0 for Part A, $1,258 for Part B, $765 for Part D, $2,305 for Medigap plan F, and another $2,000 for out-of- pocket expenses.

If you are a high earner, Medicare premiums can be even higher. Let’s fast forward five years. The Smiths are now 70 ½, the age when individuals are required to begin taking a required minimum distribution (“RMD”) from their retirement accounts. These distributions will push their annual income higher, which they don’t necessarily need as they live comfortably on $115,000 a year. Let’s assume their income rises to $320,001 per year. Obamacare imposes income-driven Medicare premiums that add to the cost of normal premiums. The income-driven premiums are based on one’s modified adjusted gross income (“MAGI”). What follows are the brackets for these premiums.

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In the Smiths’ case, they will have to pay an additional $167.80 per month per person for Part B and $51.30 per month per person for Part D. So instead of paying $2,516 annually for Part B they now have to pay $6,543 per year, an increase of over $4,000 per year. For Part D, the premiums and deductibles will increase from $1,530 per year to $2,761 per year. The total premiums increase from $12,656 per year to $17,914 per year. Over a 20-year retirement period, that will cost the Smiths’ an extra $100,000. If take into account the fact that medical expenses are projected to increase by 7% per year going forward, medical expenses add up quickly. If you take the $17,914 in today’s dollars and compound that by 7% over 20 years, you end up with annual medical expenses of over $69,000. How does your financial plan look now? Probably not as good as it did before factoring in these costs. But wait, there is more bad news. In 2018, the Medicare tax brackets change.

The Medicare premium brackets all get adjusted down in 2018. The changes are reflected in the chart below. Let’s see what this does to the Smith’s situation. The Smiths’ MAGI remains at $320,001.   Under the new brackets, with MAGI over $320,000, they are now in the highest bracket. When we add the additional premiums to their expenses, they have a Medicare expense of $19,894 per year. That’s nearly an $8,000 annual increase for the same health care coverage. Doesn’t seem fair considering the coverage is exactly the same no matter which bracket you are in.

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One can see how medical expenses in retirement can become quite expensive, especially if you are a high earner. In our next blog, we will discuss strategies for decreasing your MAGI in order to reduce the amount of Medicare premiums you have to pay.

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