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The Impact of Medicare Expenses on Retirement Income

What Your Clients Don't Know May Hurt Them

Executive Summary

For the 76 million baby boomers living in America, three things are true when it comes to Medicare coverage: It is mandatory for those collecting Social Security, it will likely be their greatest expense in retirement, and less than 8% have planned for it.1 Yet what they don’t know about Medicare will significantly influence their ability to preserve investment capital. In order to help you prepare clients for these costs, we have provided an overview of the most important rules surrounding Medicare premiums, as well as practical guidance on how these rules impact common retirement investment vehicles.

Important Medicare Rules

  1. Medicare is Mandatory

    In order to collect Social Security, retirees must acquire Medicare when eligible. Failure to do so means forfeiting all current, future, and past Social Security benefits.

  2. Payments Are Based on Income

    Medicare is means-tested, meaning the more income an individual or couple generates in retirement, the more their health care payments under Medicare will be.

  3. Most Expenses Are Automatically Drawn From Social Security Benefits

    Medicare Part B premiums, along with any surcharges, are deducted directly from Social Security. It is currently optional for Part D premiums to be deducted directly from Social Security benefits, but it is recommended as missed payments can result in penalties.

  4. Income Is Broadly Defined by Medicare

    Medicare considers adjusted gross income plus tax-exempt income, or everything on lines 37 and 8b of the IRS Form 1040, when determining Part B and Part D premiums. Carefully structuring retirement income sources with a sensitivity toward which investment vehicles are factored into Medicare premiums, and which are not, can make all the difference in the lives of clients. Here are examples of each:

    • Considered as Income:


      Social Security
      Wages
      401(k)s
      Pensions
      Traditional IRAs
      Rental income
      403(b)s
      Capital gains
      457 plans
      Dividends
      SEP-IRAs
      Qualified annuities

    • Not Counted as Income:


      Heath savings accounts (HSAs)
      Home equity (in certain circumstances)
      401(h) plans
      Roth accounts
      Certain life insurance plans
      Certain annuities

Medicare Income-Related Monthly Adjustment Amount (IRMAA) Brackets (2016)

Annual earnings of just $0.01 over an IRMAA bracket could mean a 40% higher Part B premium. Read more...

The Impact of Medicare Expenses on Retirement Income

Read the Full Article

This paper reviews the most important rules surrounding Medicare premiums, as well as practical guidance on how these rules impact common retirement investment vehicles.

Dan McGrath provides his services as an independent contractor and is not an employee or partner of T. Rowe Price. He developed and is responsible for this content.

1 Jester Financial, NPR Family Matters

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