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Since health care is one of the biggest expenses seniors have to face, your Medicare costs and benefits should be a key part of your budget when planning for retirement. It’s important to have a solid understanding of Medicare basics, including costs and benefits. The smartest things to do are to factor in Medicare costs when planning for retirement, and to choose the Medicare plan that makes the most financial sense for you.

Two of the ways you can get your Medicare health insurance when you retire are: Original Medicare, Part A and Part B, or through private insurance such as a Medicare Advantage plan (Medicare Part C).

You generally become eligible for Medicare when you turn 65 or older or when you qualify by disability. You may also qualify for Medicare at any age if you have end-stage renal disease requiring dialysis or a kidney transplant, or amyotrophic lateral sclerosis (also known as ALS or Lou Gehrig’s disease). You must be an American citizen or permanent legal resident of at least five continuous years.

Original Medicare

Premiums for Original Medicare, Part A and Part B, are generally similar for most beneficiaries.

Medicare Part A (hospital insurance) is premium-free for most people. If you’re not eligible for premium-free Medicare Part A (you haven’t worked for 10 years paying Medicare taxes), you may have to pay a monthly premium of up to $458 in 2020, depending on if you paid any Medicare taxes. Use the Medicare Eligibility and Premium Calculator to find out if you qualify for premium-free Medicare Part A.

Medicare Part B (medical insurance) requires a monthly premium. Your Medicare Part B premium can vary depending on your situation. For many people, the premium is automatically deducted from their Social Security benefits.

The standard monthly premium is $144.60 in 2020.

Your premium could be higher than the standard Part B premium if your income exceeds a certain amount.

Read more details about the Medicare Part B premium.

Medicare Part A and Part B cover medically necessary services such as surgeries, treatment of serious illnesses, and recoveries from those events, as well as some preventative care. But if you have only Original Medicare, you’re responsible for paying certain out-of-pocket costs, including premiums, deductibles, copayments, and coinsurance. Also, Original Medicare doesn’t cover most prescription drugs, or other services such as routine dental and vision care.

Medicare Supplement insurance plans

If you want help paying for some of the out-of-pocket costs not covered by Original Medicare, you can sign up for a Medicare Supplement insurance plan (also known as Medigap). Medigap insurance plans are also available through private insurance companies and are meant to supplement your Original Medicare coverage.

The best time to sign up for Medigap is during your Medigap Open Enrollment Period, which starts when you’re 65 or older and enrolled in Medicare Part B. Premiums for Medigap plans vary depending on several factors, such as the insurance company you choose, your location, and the type of plan you decide to get.

Medicare Advantage plans

If you’d prefer to enroll in an insurance plan that includes the benefits of Original Medicare, plus potentially additional benefits, you might want to get a Medicare Advantage plan.

Medicare Advantage plans provide your Medicare benefits through a private insurer. Medicare Advantage plan premium amounts vary according to the plan and insurance company you choose, plus your location. Medicare Advantage plans can include all or some combination of the following benefits: prescription drug coverage, routine dental care, vision benefits, general wellness coverage, and sometimes other coverage. You must continue paying your monthly Medicare Part B premium when you join a Medicare Advantage plan.

If you select Medicare Part C to provide your Medicare coverage, be sure to familiarize yourself with all plan options available in order to choose the health insurance plan that best suits your needs.

Medicare Part D Prescription Drug coverage

Prescription drug coverage is optional, and you can get it by enrolling in either a Medicare Part D Prescription Drug Plan or a Medicare Advantage Prescription Drug plan. These types of plans are offered by private insurance companies.

Be aware that if you don’t obtain Medicare prescription drug coverage when you’re first eligible, you might have to pay a late-enrollment penalty. The penalty generally applies if you go without creditable drug coverage for 63 consecutive days or more after your Initial Enrollment Period ends . Premiums and cost sharing will depend on the prescription drug plan and vary by location. Be aware that in addition to the monthly premium you pay for Medicare Part D, you may have to pay an income-related monthly adjustment if your income from two years ago, as reported on your IRS tax return, was above a certain limit.

So, once you’ve enrolled in Original Medicare, it can be a good idea to sign up for Medicare Part D.

Late-enrollment penalties

You may be automatically enrolled in Medicare when you turn 65. If you’re not automatically enrolled and you don’t enroll when you’re first eligible, you could be subject to one or more late-enrollment penalties.

Medicare Part A late enrollment: Beneficiaries who are not eligible for premium-free Medicare Part A and fail to sign up during the seven-month Initial Enrollment Period (IEP) may end up paying 10% more on their monthly premiums. You would have to pay this penalty for twice as long as you waited to sign up — so if you delayed by one year, you’d have to pay the penalty for two years.

Medicare Part B late enrollment: If you don’t enroll in Medicare Part B during your IEP, and you’re not automatically enrolled, or if you drop Medicare Part B and then enroll later, you may have to pay a 10% penalty for each full 12-month period you could have had Medicare Part B but didn’t enroll. This means that if you wait two years after your IEP to enroll in Medicare Part B, you will most likely have to pay an additional 20% on your monthly premium for as long as you have Medicare Part B.

Medicare Part D late enrollment: You could be subject to a late-enrollment penalty for Medicare Part D (prescription drug coverage) if, at any time after your IEP for Part D is over, you go without creditable drug coverage for 63 consecutive days or more (if you decide later that you want this coverage).

The Medicare prescription drug plan that you are enrolled in will calculate the number of uncovered months you were eligible for Medicare Part D but did not enroll. The late-enrollment penalty amount is calculated by multiplying as shown below and then rounding to the nearest $.10:

National base beneficiary premium ($32.74 in 2020) x 1% x number of uncovered months

With limited exceptions, you will need to pay the late-enrollment penalty for as long as you have Medicare prescription drug coverage.

Special Enrollment Period: If you’re still working when you turn 65, and you still have adequate health insurance through your employer, you may decide to delay Medicare Part B, since it comes with a monthly premium. You generally won’t be subject to late-enrollment penalties if you delay enrollment because you have other health coverage. You may qualify for a Special Enrollment Period that lasts for eight months after you retire and your employer coverage ends. You will have to enroll in Medicare during this time to avoid a late-enrollment penalty.

Keeping in mind the late-enrollment penalties and additional health-care costs you may incur if you don’t have adequate health insurance coverage, it can be a good idea to make sure you enroll in Medicare on time when planning your retirement.

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