Planning your retirement: Medicare basics

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(MoneyWatch) Finding affordable medical insurance is a critical part of your retirement planning. Once you're eligible for Medicare at age 65, insurance becomes more affordable, and you can't be denied coverage for pre-existing conditions. Despite these benefits, managing your insurance can still be complicated, and you'll need to plan carefully to make every dollar count.

Welcome back to Week 13 in my series, 16 Weeks to Plan Your Retirement. My previous post discussed how to address your medical costs before age 65. This post and three other posts this week will cover some essential steps you'll want to take regarding Medicare and medical insurance as you approach your 65th birthday. Why so many posts? The topic of Medicare and medical insurance is complex, so I decided to break the topic into four posts so I could adequately cover all the steps and strategies.

First, you'll want to understand the four parts of Medicare:

  • Part A: hospital insurance
  • Part B: physician and outpatient coverage
  • Part C: Medicare Advantage (MA) plans
  • Part D: coverage for prescription drugs

Parts A and B are very straightforward. They cover exactly what I've spelled out above. Part C, or Medicare Advantage plans (MA), is like an HMO or PPO, and it combines Part A and Part B in order to provide you with hospital, physician and outpatient coverage. The plans also usually cover Part D benefits, and they often include extra coverage for things like vision, dental, hearing aids and/or wellness services.

Now it's time to begin your homework.

Check your eligibility

Your first step is to make sure you or your spouse have paid FICA taxes for at least 40 calendar quarters -- this qualifies you for free Medicare Part A coverage. If you haven't worked that much and don't qualify, you can purchase Medicare Part A, but it will be costly. The premium in 2013 is $243 per month if you paid FICA taxes for 30 to 39 calendar quarters, and $441 per month if you paid FICA taxes for fewer than 30 quarters. If you're close to these thresholds, you might consider continuing to work and pay FICA taxes to either reduce or eliminate your Medicare Part A premiums.

Determine when you should enroll

Answers can be different for each of Medicare's four parts. For instance, if you start your Social Security income benefits before age 65, you'll be automatically enrolled in Medicare Parts A and B and should receive your Medicare card three months before your 65th birthday. You'll have the option to refuse Part B, since premiums are required, but that's usually a bad idea, unless you're getting coverage from another source (see below).

If you haven't started your Social Security benefits by age 65, you'll want to enroll in Medicare Parts A and B sometime during the three months prior to your 65th birthday, even if you continue to delay the start of your Social Security income benefits. If you don't sign up for coverage before your 65th birthday, coverage can be delayed and late penalties may apply. You'll also want to enroll in Medicare Part D before your 65th birthday, unless you're getting coverage from another source (see below).

Warning: If you delay signing up for Medicare Part B or Part D after you're first eligible, there might be a penalty applied to your premiums.

If you decide you'd rather be covered by a MA plan than be covered separately by Medicare Parts A and B, you'll want to select and enroll in your MA plan before your 65th birthday, again so there's no delay in coverage and you don't incur any penalties.

If you continue working beyond age 65 and are covered by your employer's medical plan as an active employee, make sure you understand how that plan coordinates with Medicare. The best way to do this is to consult with your HR department or benefits administrator. Many employer-sponsored plans require you to enroll in Medicare Part A but not Part B. You'll also want to determine whether your employer's plan covers prescription drugs; if so, you won't need to sign up for Medicare Part D while you're covered by your employer's plan.

If you don't enroll in Medicare Parts B and D because you're covered by your employer's plan, the late enrollment penalties mentioned above won't apply. To avoid a late penalty completely, however, you'll generally need to enroll in Medicare Part B no more than eight months after you eventually retire and buy a Medicare Part D plan within 63 days of your retirement date.

In most cases, you won't want to elect a MA plan while you're covered by your employer's medical plan as an active employee, since you'll be duplicating coverage and wasting the premiums you'd have to pay for the MA plan.

Should you enroll in Medicare Parts B and D, since coverage is optional and you have to pay premiums for this coverage? See my next post for answers to this critical question.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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