Medicare: An important piece of the financial planning puzzle

The clients we help by planning for a safe and financially secure retirement are most vulnerable after they reach the age of 65. This is when, for most people, incomes drop and financial risks associated with health care expenses grow substantially. Decades of financial planning begin to pay off, but if those plans don’t consider health care as a vital piece, the entire puzzle may fall apart.

Medicare planning should not be an afterthought. Plugging any leaks in health care is essential to ensuring that your clients’ plans are not disrupted, because at age 65 and older, they will not have time to recover if large expenses arise. There is no financial stop-loss with Medicare, so debts can mount quickly when a medical catastrophe occurs. A lifetime of financial planning can be undone by one bad diagnosis, potentially impacting your client’s quality of life and care options as well as the financial well-being of your client’s spouse, children and future generations. 

When it comes to health care in retirement, your clients will have three options to protect themselves and their families’ finances. First, they may have a retirement group health benefit (or a workplace benefit if they are still employed). It is important to evaluate these plans because they may or may not be the best solution. Calculating our clients’ premiums plus out-of-pocket costs and comparing those to private-market options sometimes yields surprising results. Even outstanding workplace benefits packages for people under age 65 are not always best for those over 65.

The other options involve replacing or supplementing Original Medicare (Parts A and B). Medicare Part A results in a series of recurring deductibles and copays, sometimes amounting to thousands of dollars. These expenses may come multiple times in a year if your client has significant health care needs.  Medicare Part B, more or less, leaves a beneficiary with 20% of the remaining unpaid medical costs. But there’s no maximum out of pocket, so 20% for a healthy person can be pocket change, while 20% for a person undergoing cancer treatment (as an example) can be hundreds of thousands of dollars. This is the reason insurance exists and why financial planners recommend insurance to cover these holes.

The second option, a Medicare supplement, often referred to as “Medigap” coverage, helps pay expenses like copayments, coinsurance and deductibles that regular Medicare doesn’t cover. These are policies only available to people who have both Medicare Parts A and B. It is important for clients to understand that each of the 10 different types of Medigap policies, called Plans A through N, offers different benefits and levels of coverage. However, each of the plans is standardized in most states, so coverage under a specific plan is the same no matter where the client buys it. 

The third option is a Medicare Advantage plan, which avoids Medicare’s charges but comes with the insurance company’s copays and limits instead. These plans are offered by private insurers. They replace the cost-sharing of Original Medicare and may also offer additional coverages, such as vision, dental or hearing.

No one gets health care for free

Each option has its own merits, and there’s no “correct” option for all, but there is a correct option for each person based on their financial comfort level and health risk tolerance. But regardless, no one gets health care for free. They still pay something; it’s just a matter of when, where and how much.  

Finally, the cost of prescription drugs can throw a wrench into a finely crafted retirement health care plan. I generally tell clients to be prepared for annual costs of up to $2,000, although we hope those costs will be less. 

Planning to cover health care expenses in retirement is complicated, and it’s something most people should not tackle on their own. If it’s not done effectively, unexpected expenses can derail decades of otherwise good financial planning, drain your clients’ retirement savings and leave them feeling disgruntled that their financial professional failed to account for the health care risk. Not every financial professional needs to be a Medicare expert, but we must understand how health care costs can impact retirees. And it’s a good idea to have someone in your referral network who can help your clients with their Medicare planning.

Elie Harriett, ChHC, has been a NAIFA member since 2004 and currently serves on the NAIFA National Government Relations Committee. He is the co-owner of Classic Insurance & Financial Services in Mansfield, Ohio. Contact him at [email protected].