The future of our healthcare system is highly debated topic, and it is one that affects each of us. Consider these staggering numbers:
Health care costs have nearly doubled since 2000.[1]
2018 annual health care costs in the U.S. translate to $11,172 per person in 2018 compared to just $146 per person in 1960.[2]
Emergency rooms charge anywhere from 1.0 – 12.6 times more than what Medicare pays for services.[3]
Over the last decade out-of-pocket spending for healthcare has increased by 67% in the form of higher co-pays and deductibles.[4]
Healthcare costs have risen faster than normal inflation and increases in average income.[5]
The state of our healthcare system continues to be a stress on retirement budgets, and it is important to plan ahead to make sure you know how to cover your expenses before you retire. According to a study done by Fidelity, Medicare part B and part D premiums will make up almost 40% of your healthcare expenses in retirement. In addition to this, many retirees may be in for a surprise if they don’t know the rules when it comes to Medicare premiums.
“The Stealth Tax on Medicare” IRMAA (Income-related monthly adjustment amount)
Medicare part B is your primary medical coverage under the Medicare program. It covers your doctor visits for primary care and specialists, while Medicare part D is prescription coverage. These two parts of Medicare require a monthly premium when you enroll. What many people don’t realize is that the premium changes based on your income levels. The IRMAA is an adjustment amount that is added to the base premium if your Modified Adjusted Gross Income exceeds certain thresholds. Some have called this the “stealth tax on Medicare.” Here is how it works:
Your modified adjusted gross income is your adjusted gross income with some adjustments added back. Some of these adjustments include:
Municipal bond interest
Rental losses
½ of self-employment tax
As you can see in the chart above, the IRMAA is based on your MAGI in the 2nd year previous. This is why it is important to plan ahead.
Common events that cause a spike in income
Selling an investment property
Taking capital gains
Selling a business
Bonuses
Required minimum distributions
It is also common to see an IRMAA when the household is married filing jointly and one spouse is still working. Keep in mind that even if one spouse is not enrolled in Medicare, the adjustment is based on household income.
It is important to know where your income will fall at the end of the year and make strategic decisions when it comes to these types of events to try and reduce taxes or increases to Medicare premiums.
Planning for the year you retire (Form SSA-44)
Form SSA-44 is a form provided by the Social Security Administration that allows you to apply for a reduction to the IRMAA. This is an important form to review for the year that you retire if you are notified that your Medicare premiums will increase. The form requires that you provide documentation on life-changing events such as retirement, job-loss, marriage, divorce, death of a spouse, loss of an income-producing property, etc.
You can access the Form SSA-44 here.
The essential step in retirement planning
Healthcare is a major expense in retirement, but it is just one piece of the plan. It is essential to create a retirement budget and know exactly what your required expenses will be. Life always surprises us and it rarely goes according to plan. However, creating a retirement plan will help you get educated on the rules and will provide a roadmap for making big decisions when they present themselves.
[1] Planning for Health Care in Retirement. FMR LLC 2020. [2] Centers for Medicare and Medicaid Services, December 2018. [3] 2017, “Medical Emergency: ER Costs Skyrocket, Leaving Patients in Shock,” Modern Medicine. [4] “Tracking the Rise in Premium Contributions and Cost-Sharing for Families with Large Employer Coverage,” Peterson-Kaiser Health System Tracker, 8/14/2019. [5] Planning for Health Care in Retirement, FMR LLC 2020.