As you approach retirement, it’s really important to understand Medicare thoroughly. While financial advisors might overlook it because it doesn’t directly affect your retirement income, at J.A. Lawrence Wealth Management, we stress that knowing all your expenses—including healthcare—is critical for a successful retirement plan. That’s why researching Medicare in detail is so crucial.
Medicare is a federally-run insurance program designed for senior citizens. During our working years, we contribute to Medicare through the FICA tax. This tax is divided into two parts: OASDI, which is often called Social Security and makes up about 80% of the FICA tax; and the remaining 20% goes to Hospital Insurance, known as Medicare Part A.
Medicare is divided into four main parts: Part A, B, C, and D. Understanding these parts is essential for planning your healthcare strategy.
**Part A:** Known as Hospital Insurance, Part A covers hospital stays but not the physician’s fees. Funded by the FICA tax, it is generally available to everyone 65 and older. This basic coverage is something you’ve been paying into throughout your working life and should sign up for.
**Part B:** This covers doctor services, including blood tests, medical equipment, home healthcare, and outpatient care. Essentially, while Part A covers your hospital admission, Part B takes care of services within the hospital. It costs about $135 per month, but can be more expensive if your income is above $170,000 a year as a couple. Part B is as essential as Part A.
Together, Medicare Parts A and B, often called Original Medicare, cover about 80% of healthcare costs, while Parts C and D cover the remaining 20%.
**Part C:** Also known as Medicare Advantage or Medigap, this allows you to see doctors and specialists for non-emergency reasons. Medigap insurance typically costs between $100 to $200 per month and any physician who accepts Parts A and B will also accept Medigap. If you sign up for Medigap when you enroll in Parts A and B, you qualify regardless of age or health. However, if you initially choose Medicare Advantage instead and decide to switch to Medigap later, you will need to go through underwriting. Medigap plans are sold through insurance companies, but they offer identical coverage, so it’s best to shop around for the best price.
**Medicare Advantage:** This operates more like private health insurance and is also run by insurance companies. It works on a network basis, which makes it a potentially cheaper alternative to Medigap if you live in an area covered by the network. Be aware that Medicare Advantage policies are frequently updated, so it’s important to keep track.
**Part D:** This part covers prescription drugs. While some Medicare Advantage plans include Part D, Medigap does not. Part D costs about $35 per month on average. If you opt for Medicare Advantage, it’s a good idea to work with a broker rather than a captive agent due to the complexity and constant changes of the policy.