Chances are good that you’ve seen or heard something about Medicare open enrollment recently. What is it? You become eligible for Medicare when you turn 65. You have a seven month window to enroll in the program. The window opens three months before the month you turn 65 and continues for three months after the month you turn 65. If you are already collecting Social Security before you turn 65 you will automatically be enrolled in Medicare.
Once enrolled, each year you have an opportunity to make certain changes to your coverage. That period is called the open enrollment period. It begins next Monday (October 15) and runs through December 7. Any changes you make will take effect on January 1, 2013.
During the open enrollment period you can:
- Change from Original Medicare to a Medicare Advantage Plan (or vice versa)
- Switch from one Medicare Advantage Plan to another
- Switch from a Medicare Advantage Plan that doesn’t offer drug coverage to one that does (or vice versa)
- Join a Medicare Prescription Drug Plan
- Switch from one Medicare drug plan to another Medicare drug plan
- Drop your Medicare prescription drug coverage completely
You can review and compare coverage options at www.medicare.gov or by calling 1-800-MEDICARE. Also, feel free to call or email me if you have any questions.
Photo by Ben Lyon. Used under Creative Commons License.
One of the biggest obstacles to retiring early is health care. If you want to retire at 62, but don’t become eligible for Medicare until 65, you have a three-year window where you need to bridge the gap between your employer’s coverage and Medicare. Traditionally, that has meant either going without insurance (not a good idea) or paying for an individual policy (mucho deniro or not available due to pre-existing conditions).
The new health care law has elements that could make it easier to bridge the gap between employer coverage and Medicare, thus making early retirement a more viable option. The law phases in over time, so I’ll discuss the options available to you between now and 2014 and those after 2014.
Between now and January 1, 2014
In the short term, the law makes $5 billion available to employers to spend on insurance for employees who decide to retire early (visit www.errp.gov for more info). The drawback here is that your employer needs to offer retirement insurance benefits, which most don’t.
If you’re willing to buy an individual policy to bridge the gap, but don’t qualify due to a pre-existing condition, the new law also has a pre-existing conditions insurance plan. Visit HealthCare.gov to get details for your state and information on how to apply.
After January 1, 2014
Both the early retiree and pre-existing conditions programs mentioned above expire at the end of 2013. What replaces them? Starting January 1, 2014 insurers will no longer be allowed to deny coverage based on pre-existing conditions, so you can shop around with private insurers regardless of your health. If you want to retire early and still can’t find affordable coverage with a private insurance company, states will have “exchanges” where anyone can buy health insurance.
So if you plan on retiring early, it looks like you’ll have a few more options for health coverage. Work with a trusted adviser to see if these options are right for you.
As 2011 draws to a close, there are several financial moves that you should consider. Below are 10 steps that could help reduce your tax bill, solidify your investment strategy and ensure that your retirement planning is on track.
Review beneficiary designations
Many accounts, such as Individual Retirement Accounts (IRAs), 401(k)s, annuities, and insurance policies allow you to name a beneficiary who will receive those assets when you die. Many people don’t realize that those designations take precedence over their will, even if the will is more accurate and up to date. Because of this, it is important to review the beneficiary designations on all your accounts annually to make sure that they accurately reflect your wishes. Meet with your financial adviser and estate planning attorney to ensure that your designations not only pass property to the correct people, but also minimize expense and taxes.
Take required minimum distributions
If you turned (or will turn) 70 ½ during 2011 then it’s time to start taking required minimum distributions (RMDs) from IRAs and other tax deferred accounts like your 401(k). RMDs don’t apply to Roth IRAs. Your financial adviser can help you calculate your RMD based on IRS guidelines. You are required to take the distribution by December 31st of each year with one exception. If you turned 70 ½ during 2011 you can delay your distribution until April 1, 2012. If you do that, remember you will need to take two distributions next year—one for 2011 and one for 2012.
IRA charitable exclusion
The government extended the IRA charitable exclusion for 2011. Basically this exclusion allows you to distribute (tax-free) up to $100,000 from your IRA and direct it to a charitable organization. If you are charitably minded and don’t need the income from your distribution, then this could be a good way to avoid the tax bite on your RMD.
Medicare open enrollment
The Medicare open enrollment period is the time each year when those on Medicare can make changes to their existing plans to better suit their needs. If you are on Medicare, then you should review your health and prescription drug plans and decide if you want to stick with them or if you would be better served by switching to another plan. The open enrollment period typically runs from November 15 to December 31, but it has been moved up this year to October 15 through December 7. Visit www.medicare.gov for more information.
Year-end charitable contributions
One way to reduce your tax liability in a given year is to make charitable contributions. If you are considering making charitable contributions prior to year-end, consider using appreciated stock rather than cash. Not only will you benefit from the charitable deduction, but you could also avoid paying the built in capital gains tax on the stock.
Year-end gains and losses
Capital gains and losses can be used to offset each other. If you took profits in some of your investment positions this year, look to see if you have any positions that could be sold for a loss to offset the gain and minimize your taxes. Excess losses can be used to offset up to $3,000 in ordinary income taxes. Losses beyond that can be carried forward indefinitely to offset future gains.
Maximize retirement contributions
For 2011, you can contribute a maximum of $5,000 to your IRA and $16,500 to your 401(k). If you are over 50, you can contribute an additional $1,000 to your IRA and $5,500 to your 401(k) per year. By maximizing your contributions each year, you greatly increase your chances of being able to adequately fund your retirement.
Review your asset allocation
The market upheaval of the last several years and investors’ response to that upheaval has wreaked havoc on many people’s asset allocations. Rather than having a balanced, diversified portfolio, many have sought safety by moving everything to cash or bonds. That could cause serious problems in the future if inflation picks up or the bond market stumbles. To protect your assets and maximize your returns, you should meet with a trusted adviser and make sure the investments you hold are appropriate based on your risk tolerance, goals and time frame.
Review your estate plan
Your estate plan should not be a static document. As your life changes, your planning must change with it. Getting married or divorced would likely change how you want to distribute your property; likewise if there is a death in the family. Each year you should review your documents, including your will, trust, and powers of attorney to make sure that they still reflect your wishes and have the correct people taking charge if you were to die or become incapacitated. Also, if you move to another state when you retire, meet with your attorney to make sure that your documents will be valid in your new state of residence. Make revisions as necessary.
Shred unnecessary paperwork
Much of the paperwork you have can be purged once a year. For example, if your December investment statements summarize the year’s activity, you can shred the statements for the previous 11 months. Likewise, any bills, credit card statements, and receipts that you are not using as supporting documentation for your taxes can go.
According to the IRS, you should keep your tax records for “the period of time during which you can amend your tax return to claim a credit or refund, or that the IRS can assess more tax.” Seven years should do the trick for most tax documents, such as returns and any supporting documentation like cancelled checks, receipts, or credit card statements. Identity theft is on the rise, so always remember to shred documents before discarding them.
As you can see, by taking a few simple steps before year-end you can enter 2012 organized and on a firm financial footing.
Note: I first published this article at www.fpanet.org and the Omaha World Herald.
Quick Summary: The basic information you need to know about Medicare.
If you (like most) plan on using Medicare as your primary source of health care coverage during retirement, you should have a basic understanding of how it works. Unfortunately, according to a recent study by the National Council of Aging and UnitedHealthcare, a majority of baby boomers don’t. So here’s a short primer to bring you up to speed on the essentials.
What is Medicare?
Medicare is a government health insurance program that is typically available to people sixty-five and older, or those with certain disabilities or diseases.
How do I apply?
If you are already receiving Social Security or Railroad Retirement benefits, you do not need to do anything to enroll in Medicare. You will automatically become entitled to the benefits on the first day of the month you turn sixty-five. The government will mail you your Medicare card about three months prior to your sixty-fifth birthday.
If you have not started claiming your Social Security or Railroad Retirement benefits by the time you turn sixty-five, you will need to apply for Medicare. You can do this up to three months prior to the month you turn sixty-five, but not later than three months after the month you turn sixty-five. If you miss this initial window, you will likely have to wait until the next general enrollment period, which runs from January 1 through March 31 of each year (Beware that penalties apply to those who sign up after their initial enrollment window.). You can make certain changes to prior elections during the open enrollment period each year from October 15 through December 7.
You can enroll online at http://www.ssa.gov/. You can also enroll by phone or in person at any local Social Security office. If you don’t know the number to your local office, call the Social Security Administration directly at (800) 772-1213 or use the office locator at http://www.ssa.gov/.
What are the “parts” of Medicare that I have heard mentioned?
Medicare has four parts: A, B, C, and D. Think of Part A as hospital insurance. It covers all or a portion of the expenses associated with hospitals, critical access hospitals, skilled nursing facilities, inpatient psychiatric care, hospice care, and home health care.
Part B covers physician services like doctor fees, outpatient services, lab tests screenings, and ambulance services.
Part C is also referred to as Medicare Advantage and is a way to combine the benefits received under Parts A and B, as well as receive additional benefits. To be eligible for Part C, you need to be eligible for Part A and enrolled in Part B.
Part D provides prescription drug coverage. If you are eligible for Medicare, you are eligible for Part D. There are two ways to get Medicare prescription drug coverage. If you have Parts A and B you can sign up for a Medicare approved drug plan offered by an insurer in your area. If you have Part C, drug coverage is probably included in your plan.
What are the costs for each part?
There are no premium costs for those eligible for Part A. If you are 65 and not eligible, however, you can still purchase coverage by paying a monthly premium. The 2011 monthly premium for Medicare Part A is $450 for someone with 29 or fewer Social Security credits, and $248 for someone with 30 to 39 credits.
Part B is optional for those eligible for Part A, but those buying (i.e. not eligible for) Part A must also buy Part B. The 2011 premiums for Part B are $96.40 per month. If your income exceeds certain amounts (currently $85,000 for single tax-filers and $170,000 for joint filers) your premiums will be $110.50 per month.
Part C is provided by private health insurance companies that contract with the government. Because of that, the cost of Part C plans varies from state-to-state and insurer-to-insurer. To enroll, you need to be enrolled in Parts A and B, which means you will need to pay your monthly premiums with Part B as well as any premiums charged by the private insurer for your Medicare Advantage Plan.
Costs for Part D will vary. If you have Part C, chances are that prescription drug coverage is already a part of your plan. If you have Parts A and B, you can sign up for a Medicare approved drug plan offered by an insurer in your area. Premiums and medications covered will vary by plan.
What are the deductibles and or co-pays for each part?
Part A deductibles are based on the length of your hospital stay. For 2011, the deductible for hospital stays is $1,132 for the first sixty days. For days sixty-one through ninety you will be required to pay a co-pay of $283 per day. After ninety days, you have a lifetime reserve of sixty days that you could choose to use. If you decide to use the reserve days, your co-pay would increase to $566 per day. You are responsible for all costs beyond 150 days.
Part B has a $162 annual deductible. Once you reach your deductible, Part B covers 80 percent of the cost of covered services. To help cover the remaining 20 percent, you may want to consider purchasing a Medigap policy (discussed below).
Part C co-pays and deductibles vary by plan.
Part D co-pays and deductibles also vary by plan, but in general, the average premium is $30 and the annual deductible can be as much as $310. Once you’ve reached your deductible, you typically need to cover 25 percent of the costs up to a certain threshold. Once you reach that limit, which is about $2,840 in 2011, you become responsible for 100 percent of your costs up to another limit. After that higher limit is reached ($4,550 out-of-pocket for 2011), your coverage kicks back in and Medicare picks up most of the additional cost.
What is Medigap?
As you can see, Medicare doesn’t cover everything. To fill some of those gaps, there is Medigap. Like Part C, Medigap is provided by private insurers. There are twelve kinds of Medigap plans that cover a variety of different services. This could include coinsurance, additional hospital days, deductibles, preventative care, skilled nursing, and hospice care. If you have Medicare Advantage or qualify for Medicaid, you probably won’t need a Medigap plan. Not every state offers all twelve plans, so call 1-800-MEDICARE or check http://www.medicare.gov/ to find out what is available in your area.
What is Medicaid?
Medicaid is a program administered by the states and is designed to assist those who can’t afford to pay for their medical care. You can qualify for Medicaid if you belong to a certain category (disabled, elderly) and you are financially needy.
Social Security website: http://www.ssa.gov/
Medicare website: http://www.medicare.gov/
Centers for Medicare and Medicaid Services: http://www.cms.gov/
“Medicare and You” handbook:
Medicare plan finder for your area:
Every year, the Social Security Board of Trustees reports to Congress on the fiscal health of the Social Security program. Not surprisingly, high unemployment and a wave of retiring baby boomers have put a heavy strain on the program. Benefits being paid already exceed tax revenues collected and in their 2011 report, the board estimated that the program will only be able to pay promised benefits through 2036 (one year earlier than previously estimated). At that point the Social Security trust fund will be exhausted and revenue from workers will only be able to pay about 75 percent of promised benefits.
As grim as that sounds, the problems with Medicare are worse. Thanks to higher health care costs and lower payroll taxes, the Medicare Board of Trustees now expects the Medicare trust fund to run dry in 2024 (five years earlier than previously thought). The difference between promised benefits and estimated funds available is roughly $37 trillion.
What does this mean for you?
In all likelihood, your taxes will be going up and your benefits will be going down. Those close to (or in) retirement, will see fewer changes than those with a decade or more to go, but in my opinion, no one will be immune. The problems are just too big. If you’re in your sixties you will probably receive most of what was promised to you. If you’re in your forties, you won’t be so lucky. Plan accordingly.