For most people, retirement is a time to say goodbye to many of the stresses of our working lives. But it’s important to recognize that the transition into retirement is full of decisions and deadlines – and it’s important to navigate them diligently.
That brings us to an important area that too many people are unaware of: Enrolling in Medicare in a timely manner. As I’ll explain, failing to do this can lead to heavy penalties that last throughout your life.
Most people who work pay 1.45% of their earnings into the Medicare trust fund. Employers pay a matching amount (self-employed workers pay both their share and the employer share). And under the Affordable Care Act, an additional Medicare tax of .9% percent of earnings applies to individuals earning over $200,000 and couples earning over $250,000.
The good news is that Medicare will pay for a significant chunk of your healthcare costs in retirement. You are eligible to sign up starting three months before you turn 65, and your coverage can start as early as the first day of your birthday month.
Now a bit about when you must sign up – and the penalties if you’re late. The initial enrollment period spans seven months: the three months before the month of your 65th birthday; your birthday month itself and the three months following your birthday month.
Should you fail to sign up during that initial window, you can still enroll. The late enrollment period stretches from January 1 to March 31 each year, with coverage beginning on July 1. However, late enrollees may be required to pay permanently higher premiums for their coverage.
Those higher premiums don’t apply to Medicare Part A. Part A covers in-patient hospital care. Participants pay a deductible and share other costs, but generally do not need to pay premiums. Part B, which covers doctors’ visits and outpatient care, is another matter. The coverage requires a monthly premium (starting at $104.90 and increasing with the amount of your annual income), as well as a deductible and co-insurance.
If you are collecting Social Security and are eligible for Medicare, then your Part B premiums will increase by a whopping 10% for each 12-month period that you fail to enroll. At 2014 rates, that’s a minimum additional $10.49 each month for every year of late enrollment. And remember, that penalty is permanent.
Penalties also apply for late enrollment in Part D, which covers prescription drugs. That penalty amounts to 1% of the base premium for every month you delay enrolling after becoming eligible. For example, someone who delayed enrollment for 10 months will pay 10% in additional premium in 2014. If your monthly base premium is $32, you’ll pay an additional $3.20 in “penalty premium” each month this year.
These penalties may be small, but they do remain in place for the rest of your life. Collectively over time, they amount to an unnecessary additional “tax” that will serve to work against your long-term savings and investment efforts.
There are exceptions and various wrinkles embedded in the Medicare rules – naturally! For example, you can delay enrollment if you or your spouse is covered by group health insurance through an employer with at least 20 employees. In that case, you must enroll within eight months of leaving the job or losing the coverage in order to avoid the higher premiums.
To get Medicare enrollment right, it’s a good idea to devote some time to research if you need guidance. A good place to start is Medicare.gov. You should look at Medicare enrollment as part of a checklist for transitioning into retirement. That list should also include the timing of Social Security benefits and of course retirement-income planning to ensure that you remain financially comfortable in retirement.
If you would like help with planning for your retirement and managing your investments, we may be able to help. That’s just part of what we do.