One critical piece of a retirement plan is health insurance. It can be one of the largest annual expenditures in retirement, especially if you retire early. If you retire before age 65 you will have to get health insurance from your former employer, if available, or go to the Health Insurance Marketplace where costs could be $15,000-$20,000 per year for a couple. Once you reach age 65 you are eligible for Medicare. Medicare is a federally funded health insurance program that provides coverage to people who are 65 years or older, people with disabilities, and people with End-Stage Renal Disease (ESRD). While most people do not pay a premium for Medicare Part A, which covers hospital stays, they are required to pay a premium for Medicare Part B, which covers doctor visits, medical equipment, and other outpatient services. It is important to note that you need to enroll for Medicare at age 65, even if you are still working to avoid potential late enrollment penalties.
The amount that people pay for their Medicare Part B premium is calculated based on their income. Specifically, the premiums are calculated based on the Modified Adjusted Gross Income (MAGI) reported on their tax returns from two years prior. For example, the 2022 Medicare premiums are based on the 2020 tax returns.
Medicare uses a five-tier income scale to determine premiums for those with higher incomes. In 2022, individuals with an income of $91,000 or less and couples with an income of $182,000 or less will pay the standard premium of $170.10 per month. However, those with higher incomes will pay more.
For individuals with an income between $91,000 and $114,000, the monthly premium will be $237.90. For individuals with an income between $114,000 and $138,000, the monthly premium will be $305.70. Individuals with an income between $138,000 and $165,000 will pay a monthly premium of $373.50. Finally, individuals with an income over $165,000 will pay a monthly premium of $411.30.
Couples with an income between $182,000 and $228,000 will pay a monthly premium of $237.90 each. For couples with an income between $228,000 and $276,000, the monthly premium will be $305.70 each. Couples with an income between $276,000 and $330,000 will pay a monthly premium of $373.50 each. Finally, couples with an income over $330,000 will pay a monthly premium of $411.30 each.
It's important to note that the income brackets for Medicare premiums are adjusted annually to account for inflation. Additionally, those who have higher incomes but experience a life-changing event such as retirement or the death of a spouse may be able to have their Medicare premiums recalculated based on their new income.
Be sure you understand how health insurance and healthcare costs can impact your retirement budget and include them in your retirement plan calculations.