Medicare Awareness Is Crucial Missing Piece in Retirement Planning

Health care can impact finances at any age, but for working seniors, the wrong choices can become extremely costly. Ari Parker, head of Medicare advisory at the startup Chapter Advisory LLC, once worked with a plumber in his mid-70s who ran his own small shop and thought he could defer Medicare until he retired. In reality, the plumber had been uninsured for a decade and had to pay steeper monthly premiums once he signed up.

“He owed a 100% penalty, because it’s a 10% penalty for every year in which you wait to sign up for Medicare,” Parker says.

While medical decisions can greatly impact retirement savings, only 21% of retirees who have financial advisers reported that they review health care planning, according to data from investment management company T. Rowe Price.

Stuart Ritter, insights director at T. Rowe Price, says advisers and their clients need to consider health care as another category of retirement planning and budgeting, rather than a separate financial concern.

“Bring health care into the conversation that you’re already having about all the other expenses: housing costs, food, transportation,” Ritter says. “Do more holistic planning.”

Employer Insurance or Medicare?

Advisers can easily determine which clients need to focus on Medicare choices, because the federal health care program has a set, age-based initial enrollment period. All U.S. citizens and legal permanent residents have a period of several months centered on their 65th birthday to determine their Medicare coverage or an alternative.

Christine Simone, a partner in Move Health, says advisers can easily build a list of all clients turning 65 in their management software.

“Whether they’re working or not, let them know that you want to talk to them about their Medicare coverage,” Simone says. “Let them know that you’re there to support them.”

In his book on Medicare, “It’s Not That Complicated,” Parker wrote of “three Ps” to consider when choosing Medicare or private insurance:

• Providers: Is access to specific health care providers important?;
• Prescriptions: How much would specific prescription drugs cost?; and
• Priorities: What matters most—low costs, choice of providers or something else?

Only under certain circumstances can working seniors defer Medicare and remain on their employer’s health care plan or a working spouse’s health insurance. Their employer must have at least 20 employees and prove to Medicare that their insurance is “creditable,” defined as providing equivalent benefits to Medicare. A senior who remains on their employer’s insurance will have a “special enrollment period” to join Medicare once they retire. They have eight months to sign up for traditional Medicare, but supplemental Medicare insurance is only available in the first six months.

People who retire before age 65 cannot sign up for Medicare until their enrollment period begins in the year they turn 65, and their only insurance options until then are Affordable Care Act plans, COBRA or private insurance.

Medicare Plans

Medicare is an umbrella term for multiple options of coverage, and participants can switch between plans during certain enrollment periods.

Original Medicare (Parts A and B) is a common choice made up of two components:

• Medicare Part A covers inpatient care in hospitals; and
• Medicare Part B covers outpatient care, wellness visits and medical equipment.

According to data from the nonprofit KFF, 98.8% of physicians nationwide were Medicare providers last year. However, original Medicare only pays 80% of medical expenses, does not cover services like vision and dental, and only provides for individuals, rather than families.

There are several options to bolster Medicare coverage:

• Medicare Part D covers prescription drugs;
• Medigap Plans are supplemental plans sold by private insurance companies that pay for out-of-pocket expenses not covered by Parts A and B; and
• Medicare Advantage Plans (Part C) are private insurance plans approved by Medicare to replace Parts A and B. While they cover services not offered by Original Medicare, they have network restrictions on providers.

While Parts A and B have standardized costs, Medicare Advantage Plan prices can widely vary by state and insurance carrier. Given the myriad of options, both Simone and Parker say consumers and financial advisers need to consult with independent, unbiased advisers.

Having the Health Care Conversation

Fidelity Investments recently released its annual “Retiree Health Care Estimate” report, which stated that a 65-year-old retiring in 2025 is expected to spend an average of $172,500 for health care expenses throughout retirement.

Ritter suspects that framing health care as giant lifetime sums may be partially why advisers and their clients are reluctant to discuss it. The same Fidelity report found that an average of one in five Americans surveyed had never thought about health care needs during retirement.

“This overwhelming amount of money, if you think of it that way, there’s no planning to be done,” says Ritter. “That’s your whole 401(k) balance.”

T. Rowe Price offers a presentation to help advisers reframe health care as one category in a retiree’s monthly budget. The presentation cited U.S. Bureau of Labor Statistics data that found health care is only the third-biggest expense in retirement, behind housing and transportation.

However, Ritter points out that, due to the coverage of health care costs in retirement, people are likely not to know that. “You don’t see a lot of headlines about housing or transportation,” he says. “It’s skewing people’s perceptions.”

Further analysis by T. Rowe Price says the largest health care expense for most seniors is Medicare premiums. In turn, most people’s Medicare premiums are deducted from Social Security benefits, rather than savings.

The T. Rowe Price report recommended seniors use their monthly income for premiums and have a separate health savings account or another pool of assets for out-of-pocket medical expenses.

“You now start applying the principles of financial planning,” Ritter says. “We need an emergency fund, and we can estimate what those expenses might be.”

Adviser Education

Simone founded Caribou, which was acquired this year by Move Health, and Parker co-founded Chapter to help consumers discuss Medicare options with specialized advisers who are not receiving incentives from insurance companies.

“I saw a big gap in the advice that the general day-to-day consumer was receiving,” Simone says. “Financial planners and advisers would refer this business out to somebody, but they didn’t necessarily check the quality of that advice.”

Parker says people aging into Medicare are being “bombarded” with mailers, phone calls and advertisements with misleading information about private plans, and unsavvy advisers may be similarly misguided by insurance companies.

“If [advisers] don’t do their homework, then they’re just going to a carrier’s website, and they’re only going to see that carrier’s price,” Parker says. “There’s hundreds of insurance companies offering thousands of plans.”

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