One of the most important aspects of retirement income planning is figuring out a client’s healthcare costs, not least of which is Medicare. And unlike Social Security, Medicare comes burdened with a slew of choices, deadlines and sometimes penalties for errors.

“I have been helping baby boomers and seniors navigate their entry into Medicare across 49 states for 18 years,” said Danielle Roberts, co-founder of Boomer Benefits, a medical insurance agency in Fort Worth, Texas. “And one the things I’ve noticed is that often they’re very aggressively marketed to, to the point where there’s inaction because the client is afraid of making a mistake.”

That's why Roberts created a webinar, “Understanding Medicare,” to help financial advisors and clients understand the various coverage parts and plans, MediGap, Medicare Advantage and the decisions that go along with working past age 65, as well as the cost involved.

“This of course is where my world collides with yours, when we get into planning for those Part B and D premiums, which are affected by income,” she said Wednesday in a presentation of the webinar hosted by Financial Advisor.

Understanding The Basics
The first iteration of Medicare was rolled out in 1965 and included Part A for hospital coverage up to 100 days and Part B for outpatient coverage—doctor visits, lab work, physical therapy, dialysis, chemotherapy, etc.

These are the only two parts of healthcare in retirement that an advisor’s clients get from the government, Roberts said, and therefore have to be signed up for through the Social Security Administration website or through the Railroad Retirement Board.

However, there are two other parts to Medicare—Part C, which offers Medigap supplemental coverage or a Medicare Advantage Plan,  and Part D, the prescription drug plan. “The reason you don’t sign up for the other two parts of Medicare through Social Security is that they are optional and offered by private insurance companies,” Roberts said, adding that those are signed up for via insurance brokers or agents like herself.

“Part D is optional, sort of. Even though it’s a voluntary program to help retirees with their prescriptions, if people do not enroll in it when they’re first eligible, and they don’t have any other form of credible drug coverage, such as employer coverage or Veteran’s Administration benefits, then they start accumulating a penalty that grows larger with time,” she said.

And then when they do finally sign up, they can find themselves paying a lot more for Part D for the rest of their lives.

“So even though it’s optional, it’s a very important consideration for folks when they’re first coming into Medicare during their initial enrollment period,” she said.

Signing Up And Knowing The Cost
If a client signs up for Social Security between 62 and 65, they will automatically be enrolled in Medicare, with a card showing up in the mailbox one to two months before the client turns 65.

“But I also know from having worked with hundreds of financial advisors and their clients that many of the people you deal with will be considering delaying Social Security until age 70 to get that maximum benefit,” Roberts said. “So they’ll be enrolling in Medicare first, in which case they’ll be responsible for initiating their own enrollment during a seven-month window that is specific to them.”

That window opens three months before the month in which the client turns 65, and extends through the following three months, for a total of seven months. If the client enrolls during the first three months of that window, Medicare will begin on the first day of the month in which they turn 65. And there’s a bonus for clients with a birthday on the first of a month—they can start their benefits one month early.

If the client choses to enroll during their birthday month or within the three months after, benefits will start the first of the month after the application is submitted.

And then there’s the cost.

“Some people assume Medicare will be free,” Roberts said. “This may come from the fact that Part A for some people has a zero premium, it may come from people thinking of Medicare as a form of national health insurance.”

Either way, it’s estimated that each year about a million people who enroll in Medicare were surprised to find they pay for it, she said. “We run into these people. They come to us, looking for information, they’re getting ready to get enrolled, and we go over all the costs. They are totally blown away that they have to pay for Medicare, and I’ve seen more than a handful of people put off their retirement by several years because they were unaware of these costs.”

Or the clients might be aware of a base cost, but bridle at the income-adjusted surcharges.

“This is a really important area where financial advisors can help spread the word: Medicare isn’t free and people really need to prepare for these costs,” she said.

Clients can be shown that Medicare balances premiums and co-pays, just like private insurance does. Clients who have worked and paid FICA taxes for 10 years have basically pre-paid their Part A insurance already. A client can qualify under their own work history or under a spouse’s history as long as the spouse is eligible for Social Security and the couple has ben married a year.

Part B is where a client will see the standard premium structure. It’s income-based, and Medicare uses tax returns from two calendar years prior to calculate it annually

The base rate, which applies to 93% of enrollees, is currently $164.90 a month for singles earning as much as $97,000 a year, or per person for couples earning $194,000, and rises to as much as $560.50 a month for singles making more than $500,000 a year, or per person for couples earning $750,000 or more.

“That’s going to be based on your modified adjusted household gross income on your tax return,” Roberts said, which is arrived at by adding lines 11 and 2a on the form 1040.

Part D on average costs $31.50 per month, though it can range from $7 to more than $205 as it’s also on an income-based sliding scale.

The tax return that’s looked at for Medicare purposes falls under a two-year lookback, so a client enrolling in 2026 is going to be assessed on their 2024 return.

“Things that your clients are doing when they turn 63 or 64 can absolutely affect their Medicare premiums when they turn 65 or 66,” she said. “So if they have a big piece of property they want to unload and it’s going to create a big capital gain, they might want to sell that when they’re 62. Likewise, if they’re going to retire and take a big severance, Medicare will want a piece of that two years from now.”

If a client’s income changes dramatically after a Medicare cost determination is made, due to a divorce or job loss, among other reasons, the client can appeal with an explanation, she said, adding that these cases are often successful.

When it comes to cost-sharing on Part A, Medicare levies a $1,600 deductible, then requires a $400 daily copay beginning day 61 of a hospitalization, rising to $800 a day on day 91. After that, 100% of the cost is borne by the client.

On Part B, there’s an annual deductible of $226, after which Medicare picks up 80% of costs and the clients pays 20%.

Mind The Gap
To handle these costs, clients can avail themselves of Medigap coverage, also called a Medicare Supplemental plan, which charges a higher premium up front but lower cost-sharing on the backend. Or the client can choose a Medicare Advantage plan, which has lower premiums up front but higher copays, co-insurance and deductibles down the line.

“In years where you have more health conditions, you’re going to have higher cost-sharing on the back-end and a lot less predictability because no one knows when they’re going to get sick and need a lot of healthcare,” Roberts said.

The benefit of going with Medigap coverage is that Medicare is the doctor network regardless of which insurer sells the plan, no referrals are necessary, and there is national portability for those with a snowbird or RV lifestyle.

There are 10 separate Medigap plans, each covering a defined set of benefits and they’re labeled Plan A, B, C, D, F, G, K, L, M, N. The plans with the most coverage are the top sellers, she said, especially among clients who want to feel their Medicare experience is as good as or better than their working-life healthcare experience.

Less than 2% of the population enrolls in Plan A, B, C or D, because most people on a fixed income don’t want to have a plan that doesn’t cover the $1,600 deductible, or doesn’t cover skilled nursing co-insurance, Roberts said.

“Plan F was very popular for a long time, it covers 100% of all the gaps and even 80% of foreign travel,” she said, though it was discontinued for new enrollees as of January 1, 2020. “Today G is the best seller, and it’s almost the same as Plan F. The only thing different is you pay that $226 Part B deductible out of pocket.”

The rates for Medigap plans vary greatly depending on the state of residence, age, gender, and tobacco use.

Put it all together, a single client with less than $97,000 in income would pay nothing in a given month for Medicare Part A, $164.90 for Part B, $31.50 for Part D, and, say, $120 for Plan G, or a total of $316 per month.

“And that’s a plan with a $226 deductible and 100% coverage on coinsurance for that. They don’t even have doctor copays. The only copays they have are for their drug plan,” she said. “Just to put that in perspective, as a self-employed person, I pay $600 a month for a $3,500 deductible, that has 80/20 coinsurance. I am counting down the years until I can buy coverage that is this comprehensive at such a good price.”

It’s extremely important that when a client first signs up for Medicare and enrolls in Part B, the client must also sign up within six months for Medigap in order to have seamless, no-questions-asked coverage, Roberts emphasized. If they miss that window, in most states their insurer can review health, insurance and prescription histories and can accept or decline the application based on risk.

Medicare Advantage
For clients who miss the window, the rate they’re given may be too expensive, and for them Medicare Advantage is the next option. Today, 51% of retirees enroll in Medicare Advantage, and usually this choice is based on price, Roberts said.

The Medicare Advantage plans typically have HMO or PPO networks for Medicare Part A and B coverage, and their contracts usually are for regional or even local doctors and hospitals. Many retirees don’t mind this, because they want to stay local anyway, she said.

“But one thing people get wrong about Advantage plans is that they think if they enroll in an Advantage plan they don’t have to pay for Part B, and that is incorrect. You must enroll in A and B and stay enrolled in them to choose either a Medigap plan or a Medicare Advantage Plan,” she said. “So even if you find a Medicare Advantage plan that has a zero premium, you still have to be enrolled in Part B and pay your $164.90 per month.”

The TV commercials touting zero cost Medicare Advantage plans are gimmicks, she said, and the worst way anyone can sign up for Medicare insurance. That plan might exist in some county in the U.S., and available as offered to someone who is at 110% of the poverty level and on Medicaid, but that’s not what someone who calls in to hear more will be sold.

“When you call in the chances that you will qualify for all of those things are almost none,” she said. “And they pressure you hard. So you sign up and go to your doctor but find your doctor isn’t in the network. Or you go to fill your $600 a month Lantus medication. Not covered. That person who had you on the phone could care less because they will never be held responsible.”

She went on to emphasize there’s nothing wrong with Medicare Advantage plans as a concept, and they work fine if people know what they’re buying and that it actually is the right match for them.

The provider will keep the premium for the HMO or PPO network as low as possible for good reason—Medicare pays the company $1,000 a month to cover each client’s health risk, she said.

“So if they can provide you healthcare for less than $12,000 a year, they’re making money,” she said. “They can also qualify for thousands of dollars of additional money in bonus payments, and so that’s how they can offer the plans for zero. They’re getting paid from somewhere else.”

They also aggressively manage their costs through their HMO or PPO networks, where at their most restrictive clients pick a primary care doctor, get referrals to sees specialists and receive no out-of-network coverage at all, except in emergencies. Plenty of consumer have been doing this their whole lives, Roberts said, and are used to the system.

“And the good thing about Advantage plans is no health questions are asked, so anyone can get signed up during a valid election plan,” she said.

Then there are the perks. Because they’re making so much money from Medicare, these companies can build in tons of extras not seen in original Medicare with Medigap—things like dental, vision, hearing, gym memberships, over-the-counter benefits of $50 a month to buy vitamins and minerals from their online store.

“Some will install bathroom grab bars in your home for safety, they might have four days a month of adult day care or caregiver respite,” she said. “They really compete on benefits. So someone on a tight fixed income is going to be very tempted, and that’s fine. As long as they check their doctor is in the network, their favorite hospital is in the next work and any expensive brand-name drugs they need are in the formulary.”

She suggests clients who sign up for Medicare Advantage plans take the cost difference between that and a Medigap plan and put it aside to accumulate in case there are future expenses not covered by the Advantage plan that would have been covered by Medigap.

“That way the client is covered and can sleep at night,” she said.

Not Ready For Retirement
And finally, for clients who work past 65 and have large group health insurance through their employer, that employer’s insurance is going to be considered primary, and already has outpatient benefits and drug benefits.

“Why would you want to enroll in Part B and D and pay premiums for those when you don’t need to?” she said. “Your group coverage would be primary, and Medicare would be secondary.”

Instead, these clients should enroll in Part A at 65, because there’s a zero premium for Part A at that point. It can coordinate with the employer coverage and reduce the client’s spending in the event of a hospital stay, she said.

But the client should delay Parts B and D, she said, and apply for them two months before they want to retire, and follow up to make sure that Medicare has all the proper documents so there are no penalties.

The one exception, Roberts said, if is the client is contributing into a Healthcare Spending Account. In that case, the IRS will cut off contributions if there’s a secondary form of insurance.

“So those people would want to delay all the parts of Medicare—not enroll in A, B, C or D—until they retire,” she said.

The opposite is true for people who work for small employers, where Medicare would be primary.

“For sure you want to sign up for A and B right away when you turn 65. Otherwise, who is going to pay 80% of an outpatient surgery if you didn’t sign up for Part B?” she said. “It’s going to be you.”

Other reasons to sign up for Medicare at 65 are: if the client has retiree coverage from their employer (Medicare A and B will still be primary), if the client is using COBRA (a secondary insurance, so Medicare A and B will be primary), or if the client is using a plan from the ACA healthcare exchange, which might look cheaper because it’s subsidized but Medicare will eventually claw back the subsidy plus a late penalty because people older than 65 don’t get the subsidy.

And finally, people who have Federal employee health benefits can enroll in just Part A when they turn 65, but they’ll end up paying higher copays through the Federal employee benefits, so they might as well sign up for the rest as well, she said.