Sticking to a budget is never more critical than when you are in retirement. Most retirees live off their portfolio, rental income, pension, and/or social security. When working with clients, we examine all guaranteed and investment-related income sources. We design a Cash Flow Plan to optimize the most tax-efficient and reliable income stream for a client's situation and budgeted living expenses. We all understand that spending more than budgeted can eat into one's nest egg. Still, many retirees overlook the impact of how extra investment distributions can cause their Medicare premiums to increase substantially.
Medicare is a critical component of many retirees' healthcare plans, but the various parts and premiums can be confusing. It is essential to have a basic understanding for cash flow planning purposes.
Here is a quick breakdown:
Medicare is divided into several parts, each with its own premiums:
Medicare Part A (Hospital Insurance): Most people do not pay a premium for Part A if they or their spouse paid Medicare taxes while working. If you don't qualify for premium-free Part A, you may be able to buy it.
Medicare Part B (Medical Insurance): The standard Part B premium for 2024 is $174.70 per month or $2,096.40 a year. Most people pay the standard premium amount, but if your modified adjusted gross income (MAGI) is above a certain threshold, you will likely pay a Medicare surcharge known as an Income Related Monthly Adjustment Amount (IRMAA). Your MAGI is your income before deductions and can include pension, social security, capital gains from investment sales, IRA distributions, tax-exempt interest, and more. Since pensions and social security payments are predictable, it is important to consider how your various investments will impact your MAGI. That extra one-time IRA distribution or large capital gain from selling a property may cause your Part B premium to increase substantially.
Part B costs are deducted from your Social Security payments so that IRMAA can cause a surprise decrease in your monthly cash flow. IRMAA surcharges are challenging to plan for because they're based on your income from two years ago. So, your 2024 premiums are based on your 2022 income. Even worse, if your income is even $1 over a threshold, this could result in higher premiums. Part B premiums can jump from $174.70 up to $594 a month.
Medicare Part C (Medicare Advantage): Premiums for Medicare Advantage plans vary depending on your chosen plan. Some plans offer $0 premiums, but you must still pay your Part B premium. We recommend working with an experienced professional to determine which plan is right for you.
Medicare Part D (Prescription Drug Coverage): Like Medicare Advantage, Part D premiums vary depending on the plan. IRMAA also applies to Part D premiums for higher-income beneficiaries. Surcharges range from an extra $12.90 a month up to $81 a month. Certainly not as impactful as Part B, but still worthy of your attention.
It is important to note that IRMAA is calculated annually based on your income thresholds and tax returns from the previous two years. You can utilize some exceptions and request Social Security to reevaluate a surcharge. These exceptions are known as "life-changing events." These events include the death of a spouse, marriage, divorce, or loss of income due to stopping work or retirement. If you feel you qualify for an exception, then you can contact your local Social Security office and show the required proof.
Here is a link to the IRMAA Sliding Scale Tables and some helpful information on Premiums: Rules for Higher-Income Beneficiaries.
Over the last decade, the number of recipients owing IRMAA surcharges has doubled. In 2023, 5.2 million retirees paid a Medicare surcharge. Sometimes, the surcharge is unavoidable and even justified to keep things equitable. But other times, a surcharge could have been avoided or reduced with a bit of planning. Feel free to reach out if you want help with your own individual planning.