Medicare facts and coverage gaps

Planning ahead for health care expenses is essential. Determining how much you’ll need, however, depends on a variety of factors. Your costs will vary based on your income, age, health, location, your Medicare or supplemental plans and life expectancy.

Review the information below to learn how you and your family can prepare for the future.

Evaluating retirement health care costs

The financial impact of dealing with a serious illness can be devastating, and even everyday medical expenses such as prescription drug costs and routine medical services can add up over time. Planning now can help ensure you have enough money to pay for healthcare throughout retirement.

The amount of savings needed for health expenses for people eligible for Medicare, according to the Employee Benefit Research Institute (EBRI)1:

  • Medicare beneficiaries pay a share of their health expenses out-of-pocket because of program deductibles and other cost-sharing. In 2015, Medicare covered 60 percent of the cost of healthcare services for Medicare beneficiaries ages 65 and older, while out-of-pocket spending accounted for 12 percent, and private insurance covered 15 percent.
  • In 2018, a 65-year-old man with median prescription drug expenses needs $75,000 in savings and a 65-year-old woman needs $99,000 if each has a goal of having a 50 percent chance of having enough money saved to cover health care expenses in retirement. If either instead wants a 90 percent chance of having enough savings, $148,000 is needed for a man and $161,000 is needed for a woman. This analysis does not factor in the savings needed to cover long-term care expenses.
  • Savings targets increased between 2 percent and 13 percent since 2017. For a married couple both with drug expenses at the 90th percentile throughout retirement who want a 90 percent chance of having enough money saved for health care expenses in retirement by age 65, targeted savings would be $399,000 in 2018.

According to the EBRI, this information is based on dollars needed for Medigap premiums, Medicare Part B premiums, Medicare Part D premiums and out-of-pocket drug expenses for retirement at age 65 in 2017. 

 

Introduction to Medicare

Medicare is a federal health insurance program that provides coverage for people age 65 and older, and for some disabled people under age 65. The program consists of four parts, each of which covers different health-related expenses.

The different parts of Medicare

Medicare Part A
Medicare Part B
Medicare Part C
Medicare Part D
Hospital Insurance
Medical Insurance
Medicare Advantage
Prescription Drug Plan
Helps pay for in-patient care in a hospital, skilled nursing facility (following a hospital stay), some home health care and hospice care
Helps cover services like lab tests, surgeries, and doctor visits in addition to supplies like wheelchairs and walkers that are considered medically necessary to treat a disease or condition.
Allows you to participate in PPO-, PFFS, and HMO-type managed care plans
Helps pay for medications prescribed by doctors
No premium if you and your spouse paid Medicare taxes during 40 or more quarters
Optional coverage
If you are enrolled in Medicare Part A and Part B, you are eligible to switch to Part C
Pays outpatient drug care costs
 
Requires a monthly premium payment for all participants2
 
Requires a monthly premium payment for all participants3
 
 
 
Deductible and cost-sharing limits may apply. In the coverage gap stage, there are different cost sharing percentages for brand name vs. generic drugs

Several types of Part C plans are available, including:

  • Preferred Provider Organization (PPO). This plan allows you to see any doctor or specialist; however, visiting doctors outside your PPO network will involve extra costs.
  • Health Maintenance Organization (HMO). You have access to doctors in the HMO network only.
  • Private Fee-for-Service (PFFS). You can see any doctor who is willing to accept the fees and terms of the PFFS.
  • Special Needs. These plans are intended for people with certain chronic diseases or special health care needs.
  • Medical Savings Account (MSA). This plan includes a high-deductible health insurance plan and a savings account in which Medicare deposits money for you to use for health care costs.

Enrolling in Medicare

If you are already receiving Social Security, you are automatically enrolled in Medicare at age 65. If you want to enroll in Medicare but are not taking (or not eligible for) Social Security, you can enroll three months before the month of your 65th birthday and the three months after. For example, if your birthday is March 15, you can apply anytime from November through the end of June.

Medigap and Medicaid

Medicare is only one of the sources of health care coverage available to retirees. You may also be eligible for Medigap or Medicaid.

Medigap
Medicaid
Individuals enrolled in Medicare Parts A and B are also eligible to purchase Medigap coverage from insurance companies.
Individuals with limited income and resources who meet certain requirements may also be eligible to receive Medicaid.
Coverage and costs vary by state.
Medicaid is an insurance program sponsored jointly by states and the federal government.
Generally helps pay costs not covered by Medicare like deductibles, co-payments and co-insurance. 
Covers some hospital care, prescriptions, personal care services, and nursing home costs
Enroll through private insurance agencies.
Contact your state Medicaid program for additional details.

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)

COBRA makes group health coverage available at group rates for employees and their dependents who would otherwise lose health benefits when they retire, leave their job or have certain other qualifying events.

Generally, employers with 20 or more employees are subject to COBRA. Coverage applies to employees, former employees and certain dependents who are or were covered under a group health plan. Benefits include medical, dental, vision, healthcare reimbursement and employee assistance programs.

Long-term care insurance and planning for long-term care

The average duration of long-term care for a retiree is estimated to be about three years. While long-term care (LTC) costs vary widely by region and type of facility, the national median cost of one month in an assisted living care facility was $4,000 in 2018 – or $48,000 per year. A private room in a nursing home costs about $8,365 a month, or a whopping $100,375 per year4. That adds up to $301,125 for three years of care — a significant expense which is expected to rise in the future. Medicare and Medigap policies offer limited, if any, coverage for LTC.

One way to plan for these costs is to purchase LTC benefit insurance. Premiums for this coverage vary by company but are generally based on your age, health status and the level of benefit you are purchasing. Make sure that the benefit on your LTC insurance policy will be enough to cover the average cost of care in your region in the future.

High-Deductible Health Plans (HDHP) and Health Savings Accounts (HSA)

A High-Deductible Health Plan (HDHP) may offer a practical way for retirees under age 65 (and therefore not yet eligible for Medicare) to deal with their medical costs. HDHP differs from other health insurance plans because its high deductible allows the policy to be offered at relatively low cost.

If an HDHP meets certain requirements, the policyholder may also open a Health Savings Account (HSA) to pay for HDHP deductibles and other qualified out-of-pocket costs. Money withdrawn from the HSA to pay for qualified expenses is tax-free as long as the expenses were incurred after the HSA was established and funded.

For 2018, the maximum annual contribution rates to an HSA are $3,450 for an individual and $6,900 for family coverage. Those who have reached age 55 but are not yet age 65 may contribute an additional $1,000 for 2018.

You can use an HSA account to pay for medical expenses as they occur, or you can accumulate funds in the account to pay for future health care expenses. Note that any distributions taken prior to age 65 that are not used for eligible medical expenses are subject to income tax and a 20 percent penalty.

Insurance Marketplaces

Beginning in 2014, public and private insurance marketplaces became available to purchase coverage for individuals and small businesses.

The marketplaces in each state are designed to allow you to compare coverage and cost among the policies offered by area health insurance companies. Some states run their own marketplaces, others have opted to have the federal government run them. Either way, you purchase insurance through your state marketplace.

An Ameriprise financial advisor can work with you to help build a confident retirement that anticipates health care costs and other major expenses in retirement.

Find answers to your retirement questions

 

Disclosures

1 Source: Employee Benefits Research Institute (ebri.org) October 8, 2018, No.460. Savings Medicare Beneficiaries Need for Health Expenses: Some Couples Could need as Much as $400,000, Up From $370,000 in 2017.
2 Medicaid pays the premium for those who are eligible for Medicaid benefits.
Individuals with limited income and resources may not have to pay a premium or deductible. Contact Social Security at 800.772.1213 or visit ssa.gov for more information.
4 Genworth 2018 Cost of Care Survey, conducted by CareScout®, June 2018
Before you purchase, be sure to ask your sales representative about the insurance policy’s features, benefits and fees, and whether the insurance is appropriate for you, based upon your financial situation and objectives.
Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consult your tax adviser or attorney regarding your specific situation.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.

Managing your taxes in retirement

Your tax situation can change rapidly throughout retirement. Applying appropriate tax strategies can help you learn how to reduce the taxes you owe so you keep more of the money you’ve earned and invested.

Knowing what is and isn’t taxable

Understanding which sources of retirement income are taxable and which are non-taxable can be tricky. These guidelines can help you get started by looking at some typical retirement income sources. When evaluating your options, be sure to consider all sources of income, and work with your advisor and tax professional to determine what makes sense for your unique situation.

Taxable
Non-taxable
Social Security – up to 85% of your Social Security benefits may be taxable depending on the amount of additional income you have from other sources
Social Security – if your combined income is below certain limits

Withdrawals of earnings and pre-tax contributions from IRAs, 401(k)s*, and other retirement plans

*Special rules apply to appreciated employer securities in qualified retirement plans. 

Withdrawals of after-tax contributions from 401(k)s, IRAs and other retirement savings plans (whether withdrawals are considered to be from after-tax or pre-tax contributions are based on the law and will depend on ordering rules applicable to the account)
Pension payments
Qualifying withdrawals from Roth 401(k)s, Roth IRAs, and Roth 403(b)s

To help you determine what, if any, part of your Social Security is taxable, the IRS has created a series of worksheets found in IRS Publication 915 (Social Security and Equivalent Railroad Retirement Benefits). The calculation is part of filling out your 1040 and is found in the Form 1040 instructions.

Minimizing taxes when possible

Work with your tax advisor to help reduce the amount of taxes you may pay during retirement by considering the following:

  • Possible advantages of deductions available to you.
  • If you itemize, use charitable gifts to potentially lower your taxable income.
  • Realize long-term capital gains if your income falls below the threshold for your filing status, so that they will be taxed at 0%.
  • If you’re in a higher tax bracket, consider selling stock at a loss to offset current gains and up to $3,000 of ordinary income. Unused capital losses can be carried forward.
  • You may be able to lower your lifetime taxes by spreading withdrawals from your IRA or 401(k) over your lifetime (even before age 70-1/2).
  • The sale of your home. You may be able to exclude capital gain on the sale of your primary personal residence up to $250,000 if you are single and $500,000 if you are married (and filing a joint return).
  • Investments in municipal bonds to generate tax-free income if you are in a higher tax bracket.1
  • Whether bunching itemized deductions in any given year may be beneficial compared to the standard deduction. Be sure to consider the increased standard deduction as a result of the tax reform legislation passed in 2017.

Sometimes it makes sense to pay taxes now to lessen your future tax liability, especially if you expect to be in a higher tax bracket in the future. If you might be in this situation, consider converting part, or all, of your traditional IRAs to Roth IRAs. 

It is important to note that significant changes were made to the tax code as a result of the tax reform legislation passed in 2017. Given these changes now is a great time to review your circumstances with your tax advisor. Additionally, many of the changes impacting individuals are set to expire after 2025 unless Congress acts. As tax laws and you situation change, it is important to remember to discuss with your tax advisor.

The benefits of working with a financial advisor and tax professional

Your advisor can help you balance your financial priorities with tax implications by helping you create a lifetime plan that meets both your personal and financial goals. Because your Ameriprise financial advisor understands your finances, he or she may also be able to recommend a tax professional for you. Working together, your Ameriprise financial advisor and your tax professional can help structure your investments and retirement distributions for tax efficiency.

Disclosures

Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
1Interest income from municipal bonds is federally tax-free, though the alternative minimum tax may apply.  Interest income from municipal bonds is also generally state tax-free to residents of the state in which the municipal bond is issued, and generally taxable to residents of other states, depending on individual state rules.  Sales of municipal bonds can result in federal and state capital gains or losses.
There are risks associated with fixed income investments, including credit risk, market risk, interest rate risk and prepayment and extension risk. In general, bond prices fall when interest rates rise and vice versa. This effect is more pronounced for longer-term securities.
Withdrawals from traditional IRAs, 401(k) accounts, and other pre-tax investments prior to age 59½ are generally subject to a 10% IRS penalty on taxable earnings, though exceptions may apply.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.

Retirement checklist

Knowing where your accounts are, how to access them and what those accounts contain is crucial to smart financial management. When you keep your financial information in one place and up to date, you can help ease stress on yourself, your family or other beneficiaries.

Get organized, for yourself and your loved ones

Maintaining important documents and sharing key information will provide peace of mind should anything unexpected occur. Be sure to periodically walk a spouse, partner, adult child or trusted friend through legal and financial records, PIN numbers, passwords and other personal information.

Complete the retirement checklist tasks below to get started.

FILE AND PROTECT IMPORTANT DOCUMENTS

 

✔  Designate a binder to hold all bills and paper statements.
✔  Keep legal documents, tax information, and permanent records in a fire-safe box in your home, or in a safety deposit box.

Go paperless

✔   Register for online account access.
✔   Create a consolidated source of information.

Automate when possible

✔   Sign up for automatic deposits, including paychecks, Social Security and tax refunds.

Catalog accounts and key documents

✔  Keep track of what’s in your safety deposit box, and share it with trusted family members and friends.
✔  Include a list of account numbers, descriptions, passwords and PINs in your safety deposit box.

Plan ahead

✔   Designate a power of attorney and consider a living will or health care directive.
✔   Write down contact information for your attorney, financial advisor and accountant and share this information with your heirs.
✔   Provide your most trusted loved ones with the combination to your home safe or access to a safety deposit box.
✔   Discuss your legal documents in detail with your advisor as it is important for your advisor to understand your needs and goals.

Download printable checklist

Identify all open accounts

If you haven’t been keeping track of your retirement and other financial accounts, it may seem daunting to get organized. But a few simple steps can make it manageable:

  • Register for online access to your accounts. It’s a good idea to do this for all of your financial accounts so that you can easily retrieve the information you need.
  • Make a list of former employers. If you think you may have a forgotten account, get the phone number from your former employer’s website and call the HR or Benefits department. They should have records to help you locate the account.
  • Gather your tax paperwork from previous years. You may have evidence of an account you rolled over or a contribution you deducted.
  • Confirm accounts for your household. If you are married or have a partner, this is an ideal time for you to get organized together.

Once you have gathered the information you need, list the accounts, their location, current value and access information. Share the list with your spouse or partner, and then store it in a safety deposit box or home safe.

To simplify the ongoing management of these assets, you should also consider consolidating your accounts. Your financial advisor can help you review your accounts and take an overall look at your finances.

Update your beneficiaries

Each of your retirement accounts will pass to the beneficiary(ies) listed (or according to your plan’s default beneficiary if you do not list a beneficiary), regardless of what you stated in your will or trust. So it’s critical to review your beneficiaries regularly, especially after a marriage, divorce, birth or death of a loved one.

As you review your beneficiaries, keep these tips in mind:

  • Designate a contingent (or secondary) beneficiary in case something happens to your primary beneficiary.
  • Name a new beneficiary if a primary beneficiary (such as a parent) dies.
  • Remember to remove an ex-spouse after a divorce or new marriage.
  • Update your beneficiaries after the birth or adoption of a child.
  • Get guidance from an estate planning attorney before naming an estate as your beneficiary.
  • Complete a separate beneficiary form for each plan.

This is also a good time to update other documents, such as:

  • Wills
  • Trusts
  • Financial and medical powers of attorney
  • Real estate titles
  • Business ownership agreements

Keeping your beneficiary designations and legal documents up to date can help ensure a smooth transition of your assets to your heirs.

Decide what to keep and what to destroy

While it’s smart to keep permanent documents in a fire-proof and water-proof safe or safety deposit box, there are certain items that you can get rid of over time. Be sure to shred all discarded documents first, to keep them out of the hands of identity thieves. For those records you keep, make sure you tell your family and other beneficiaries how to access your safe or safety deposit box if they ever need to.

How long should you keep tax returns and other important financial documents?

Keep indefinitely
Keep for 7 years
Keep for 1 year
Keep for a month or less
Legal and permanent records
Tax-related records, such as W2s
Paycheck stubs
ATM and bank deposit slips (for transactions that can be confirmed online or through a consolidated statement)
Will or trust document
Receipts for tax-deductible purchases
Credit card statements
Receipts for non-deductible purchases, unless you are holding them for possible returns or warranty-related repairs
Birth and marriage certificates
Canceled checks
Bills such as rent, cable and electricity
 
Insurance policies
Retirement account contributions
Account statements
 
Deeds
Charitable donations
 
 
 
Large out-of-pocket medical expenses
 
 
 
Mortgage payments
 
 

For additional assistance organizing and consolidating your finances, contact an Ameriprise financial advisor.

Disclosures

Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.

Determining your retirement age

Being aware of key retirement ages can help you prepare for the future.

Catch-up contribution age. You can make catch-up contributions to many retirement plans beginning in the year you turn 50.

 

403(b) and 401(k) withdrawal age. You can start taking penalty-free withdrawals from qualified retirement plans such as 401(k)s, 403(b)s and profit sharing plans after you left your employer in the year you turned 55 or later.

IRA withdrawal age. You can begin taking withdrawals without penalty from IRAs and qualified retirement plans.

 

Social Security benefits age. You can start taking reduced Social Security benefits.

 

Medicare sign up age. You should sign up for Medicare hospital insurance (Part A) 3 months before your 65th birthday, whether or not you want to begin receiving retirement benefits.

 

Social Security benefits age. You can start taking full Social Security benefits depending on your birth year. Any delay in applying for Social Security benefits, up to age 70, can qualify you for increased retirement benefits.

RMD age. You must begin taking Required Minimum Distributions (RMDs) from most retirement accounts.

 

Disclosures

Investment advisory products and services are made available through Ameriprise Financial Services, Inc., a registered investment adviser.
The initial consultation provides an overview of financial planning concepts. You will not receive written analysis and/or recommendations.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.