Jason Parker interviews Kiplinger columnist Kimberly Lankford about Medicare Part B.
As the “Ask Kim” columnist for Kiplinger’s Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance — and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger’s Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC’s Today Show, CNN, CNBC and National Public Radio.
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Below is the full transcript:
Announcer: Welcome back, America, to Sound Retirement Radio, where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence, and freedom, as you prepare for and transition through retirement. Now, here is your host, Jason Parker.
Jason: America, welcome back to another round of Sound Retirement Radio. I’m so grateful that you’re here with us this morning. As always, I always like to start the program off with a verse to renew our minds and also a joke and something that’s maybe Christmas-oriented, if you’re going to be heading to the grandkids’ house this season. Let me start with our verse this morning. This comes to us from 2 Corinthians 9:12. “This service that you perform is not only supplying the needs of the Lord’s people, but is also overflowing in many expressions of thanks to God.” All right. Thanks to God. I love that.
Then the next one is a joke. The question is where do snowmen keep their money? In a snowbank. Wait, I got one more for you because I know that one’s just so bad that we’ll give you two bad ones. Two bad ones is always better than one bad one. Did you know that Santa had only eight reindeer last year? It’s true. Comet stayed home to clean the kitchen sink. All right. One more thing. It is the Christmas season here, and in my shower this morning, actually, I was thinking about the twelve days of Christmas. I thought, “What a wonderful song!” It’s all about the giver and the gift, and I can just imagine the person that wrote that song. Can’t you?
As they were starting to write that, they probably weren’t going, “On the twelve days of … ” They probably had a little zip in their step and a spark in their voice. “On the first day of Christmas, my true love gave to … ” I could just see my kids if they were with me right now. My son would have his hands over his ears. My daughter would be telling me her eardrums were bleeding. You guys know how it goes. “On the first day of Christmas, my true love gave to me …” What’s the next verse? Yes, you know it. A partridge in a pear tree. A couple things I thought about, and I don’t want to get off on too much of tangent here because you’re going to listen to episode 074. We’ve got a great guest lined up for you to talk about insurance as you’re heading into retirement and through retirement.
On this idea of the gift and the giver, if we went around in our lives just being grateful for those people in our lives that are true love and looking for the things that they’re doing in our lives. Maybe it’s to focus on being that true love in somebody’s life and being the one that’s giving those gifts. Let me just say that if I showed up and as the true love in somebody’s life gave them a partridge in a pear tree, really what’s wrong with that person? That’s a goofy gift, buy anyhow. Here we are episode 074, Medicare Part B premiums. We’re going to be talking about Medicare Part B, Medicare in general, as it relates to health insurance for people getting ready for retirement.
I have Kimberly Lankford as my guest. She has the “Ask Kim” column for Kiplinger’s Personal Finance. Kimberly receives hundreds of personal finance questions from readers every month. She is the author of “Rescue Your Financial Life,” “The Insurance Maze: How You Can Save Money on Insurance and Still Get the Coverage You Need,” and then “Kiplinger’s Ask Kim for Money Smart Solutions,” “The Kiplinger BBB Personal Finance Guide for Military Families.” She is frequently featured as a financial expert on television and radio, including NBC’s Today Show, CNN, CNBC, and National Public Radio. What an honor! Kimberly Lankford, welcome to Sound Retirement Radio.
Kimberly: Thank you so much for having me.
Jason: Absolutely. I’m really excited to have you on the program. You may not know this, but we’re always looking to bring experts onto the program who we believe can add significant meaningful value to our listeners’ lives. Before we get started, though, Kimberly, tell me what are you excited about with the holiday season upon us?
Kimberly: I’m just excited to visit my family. We moved about a year ago, and I live further away from my parents. We’ll get to see them up in Baltimore and get to see my in-laws in Washington, D.C. and visit a lot of friends, so just really getting a chance to see some friends and family.
Jason: Awesome. That’s great. That’s really, I think, the thing that many of us love about this time of year is to develop and deepen those relationships. We’re going to be talking about Medicare and Medicare Part B premiums especially. I know there’s been a lot of information in the news and Congress taking action. Will you take a minute and just share with our listeners what happened with Medicare this past year? Then when we talk about Medicare Part B premiums for 2016, maybe we can shed some light on what that’s going to look like as well.
Kimberly: Sure. There was a lot of concern about what was going to happen to Medicare Part B premiums this year. There’s a rule called the hold harmless provision, and it means that if there’s no cost adjusted increase for social security, if there’s no inflation adjustment, then you can’t really have an increase in Medicare Part B premiums for people who have their Medicare premiums withheld from their social security benefits. That’s about 70% of the people who are on Medicare. In that case, the problem is, though, that the Medicare premiums are based on a calculation based on medical expenses. The medical expenses for the year looked like it was going to cost a lot more than what they had been paying in the year before.
There was a big question about what was going to happen to premiums. Were those people who were normally protected by that hold harmless provision, were they actually going to have a decrease in their social security benefits because their Medicare premiums were increased? Were the 30% of the people who weren’t getting social security benefits, were they going to have to shoulder all of that increase themselves? In the end, there ended up being a bit of a compromise. The people who are receiving social security benefits and have their Medicare premium subtracted from that are not going to have an increase. They are protected by that hold harmless provision and will continue to pay $104.90 a month.
Then the people who are not protected by that, the 30% of the people who either are new enrollees into Medicare or aren’t receiving social security benefits or high income beneficiaries, their regular monthly payment will be $121.80. Then the high income people will also pay an extra high income surcharge, as they have for the last several years. For them, their monthly premiums will be either $170.50 all the way up to $389.80, depending on how high their income is. That high income surcharge only applies to single filers who earn more than $85,000 or married couples who earn more than $170,000 a year. The thing is there’s several different tiers of Medicare premiums this year, which can be very complicated.
Jason: You know, one of the things that I find, maybe you see this, too, but when people are in retirement, they’re doing retirement planning, sometimes the choices, the decisions that they make in one area of their life impact their tax return or even their Medicare Part B premiums unintentionally. One of the areas I run into this are when people are doing conversions from a traditional IRA to a Roth IRA, they don’t consider what that does to their income in a year and next thing they know, they have more than $170,000 of income for a married couple. They get penalized in some ways by having to pay a higher Medicare Part B premium. There’s little nuances, I think, that people need to be looking out for. Medicare-
Kimberly: That is exactly right.
Jason: There’s so many nuances here. You’ve got Medicare Part A, Part B, Part C, Part D. Sometimes I want to give Medicare a Part F for complexity because it is not an easy system to navigate. Will you break those different pieces down? Help our listeners. Some people don’t even know what we’re talking about. It’s like we’re speaking a different language. Part A, Part B, Part C, Part D, what are these different pieces of Medicare?
Kimberly: Sure. Medicare Part A covers hospitalization, and for most people who have worked or if their spouse has worked, then they don’t have to pay any premiums for that. Medicare Part B covers doctor services. Those are the ones that have the either $104.90 a month or $121.80 a month or more per month. The interesting thing about Medicare Part A and Part B is that you can still sign up at age 65 even though the signup age, the full retirement age for social security is now 67. A lot of people don’t even realize that they’re eligible for Medicare when they’re 65. It’s really important, first of all, to sign up within certain time frames or else you could have to pay a penalty. If you’re not still working at 65, you really need to sign up. You can sign up within 3 months before your 65th birthday month or 3 months afterwards or else you may have to pay a penalty.
If you’re still working at 65, there’s special rules and you don’t need to sign up then, unless you want to, usually until within 8 months after you leave your job. You just really need to be careful when you turn 65 to find out, first of all, do I need to sign up for Medicare, am I going to be penalized if I don’t sign up for Medicare, and what it’s going to cost. There’s a lot of real complex nuances, like you said, with a lot of the personal finance issues that could affect you for years and years in the future.
Jason: I ran into somebody recently who had retired from the federal government, and he had really great retiree benefits. He was under the impression that he didn’t need to sign up for Medicare. He thought he would rather keep his retiree benefits. The reality is that that would have been a big mistake for him. He would have ended up looking at paying penalties. Do you know what these penalties if you don’t sign up during these open enrollment periods? If you do need to sign up, what you’re penalized in the future for not signing up for Medicare Part B?
Kimberly: It’s escaping me right at the moment, but the key thing that people need to keep in mind is this is a penalty that you’re going to have to pay for the rest of your life. It’s based on the number of months that you have waited beyond when you should have originally signed up. A lot of people don’t realize. Federal employees have a really special situation because if they do change their mind to sign up later, they will face the penalty. However, most retirees have an extra complication, that as soon as they turn 65, if they’re not working, not only will they face a penalty if they don’t sign up for Medicare. Also if they do have retiree coverage, that retiree coverage usually becomes secondary to Medicare. They might also have a big coverage gap.
Even if they don’t sign up for Medicare, their retiree coverage may only pay the piece that Medicare wouldn’t cover. They need to make sure that they have that coverage. Now federal retirees have a special situation, and theirs actually can be considered primary if they don’t sign up for Medicare. If they change their mind later on, they still will get that penalty. Most retiree coverage only fills in that gap after Medicare if you’re over 65. Two huge things that could have big, unintended consequences if people just don’t realize that they need to sign up.
Jason: There’s a report that Fidelity puts out every year that talks about how much people are going to have to pay in healthcare costs as they transition through retirement. Usually that means not just out of pocket expense but also premiums. What should people be budgeting? If they’re thinking about retirement, if you were heading into retirement, Kimberly, what would you plan on seeing your medical costs increase by every year from an inflationary standpoint? Would you be saying a 3%, 5%, 10%? As you’re trying to do that cashflow equation, how much do you think people should be increasing their cost for to keep up with the rising cost of healthcare and retirement?
Kimberly: You know it is interesting, that Fidelity study, the last few years have shown it’s about $230 to $250,000 over your lifetime for a couple retiring at age 65. That actually has increased and decreased slightly over the last few years. A lot of it depends on the cost of prescription drugs, for example. Those have increased significantly over the last few years. Those have been 5% some years, higher other years. Especially even if you have Medicare Part D, which is another one of those letters that you talked about, that covers prescription drugs. You could still have really big out of pocket expenses if you have some specialty drugs that you take. A lot of times you may have health insurance coverage, you may have a Part D coverage, and still have to pay 30 to 50% of the cost of those expensive drugs. You really need to keep that in mind.
You can reassess that every year, your Part D, during open enrollment every year from October 15th to December 7th. You can look at all the plan options, look at what your costs would be, and be sure to pick the plan every year that covers your drugs. If your drugs have changed or if the plan has changed, your out of pocket expenses could be very different than they were the year before, even if your premiums remain pretty much the same.
Jason: Wow. Back to this idea … Before actually I go on to the next subject, I want to remind our listeners. For a special time, as a Christmas gift for you folks out there, if you go to soundretirementplanning.com/radio, I’ve got a free copy of my book I’d like to give you if you’re getting ready for retirement, you’re thinking about it, it’s on the horizon for you. It is only available until December 31st, so if you’re listening and you’d like …
Maybe one of your goals for the new year is to retire in 2016, by all means, visit soundretirementplanning.com/radio and request a free copy of “Sound Retirement Planning.” Back to this high surcharge or this high fee that some people have to pay as a result of having higher income. Does that relate to Part B as in boy and also to Part D as in dog? Is that what I understand to be the case?
Kimberly: Yeah. That is correct. It’s your adjusted gross income plus tax exempt interest income. If you had [inaudible 00:14:55] income that you weren’t paying taxes on, that’s actually added back into your adjusted gross income when coming up with the $85,000 for single filers or $170,000 for married couples filing jointly. For the Part B premium, if you are just slightly over that amount, you’ll pay $170.50 per person for your Part B. Your Part D, you’ll pay whatever the Part D plan that you’ve chosen costs plus a surcharge of $12.70 per month. At the highest level, this would be over $214,000 for singles or $428,000 for married couples, your Part B premium would be $389.80 per month, and your Part B surcharge, that’s above what your regular monthly bill is, would be $70.90 per person per month.
Like you said, a lot of people who don’t think they’re earning a big income or have retired and thought their income would go down, actually when they start making withdrawals from their tax deferred retirement plans or, like you said, if they make a rollover from a traditional IRA to a Roth, their income could really spike in one year and cause those premiums to really increase. It’s reassessed every year. After that one year that you’ve made a conversion, the next year you may not have to pay the high income surcharge. You really, really need to be careful. A lot of people don’t realize that even after they stop working, their income can actually be within those levels.
Jason: If you’re doing the Roth conversion, listeners, remember it’s not maybe just the tax you pay, but you could end up paying a lot more money for health insurance as a result. This is basically means testing. Do you know these thresholds that you mentioned for being considered a high income earner, are those adjusted for inflation, or is that static? Are we finding more and more people-
Kimberly: That’s exactly right. They are static. They have been level for the last few years and are slated to remain level. More and more people are falling into that threshold every year. In fact, in a few years from now, the high income surcharge for some of the highest income levels is going to be even higher. People need to be really careful. If for example you want to do a Roth conversion, you may want to keep an eye on some of these income limits and maybe spread it out over a few years so you don’t have that big spike in one year.
I also get a lot of questions from readers who are taking their required minimum distributions, and they have no control over how much they have to withdrawal from their retirement accounts. You may want to actually, before you turn 70 and 1/2 and have to start taking RMDs, start thinking about maybe making some small conversions every year to a Roth, not a big one in one year so you don’t get that bump in one year, but small conversions that may be below those income limits to help so you don’t have to take big amounts of money once you’re having to take your RMDs as well.
Jason: Boy, that’s a great point. Folks, if you’re just tuning in, you’re driving down the road this morning in the Seattle area, I want to remind you, you’re listening to episode 074 of Sound Retirement Planning or Sound Retirement Radio. I have Kimberly Lankford on the program. She’s a columnist with Kiplinger’s Personal Finance. Kimberly, if people want to learn more about the work you’re doing, maybe they have a question they’d like to submit. I know you take a lot of questions from readers around the country. What’s the best way for them to find out more about the work that you’re doing?
Kimberly: Sure. Kiplinger.com, it’s K-I-P-L-I-N-G-E-R.com, I do the “Ask Kim” column, and you can send questions directly to me through the column or just firstname.lastname@example.org. Also, we have a Medicare special report there that has a lot of information about these Part B costs, also a lot of information about choosing a Part D plan or a Medicap or Medicare Advantage plan. We also even have a calculator that can help people estimate what their mostly Medicare costs are going to be, depending on which category, whether they’re in the high income or the hold harmless or in that rest of the 30% of the people category.
Jason: Where do you find most of the questions come to you from? What’s the theme that you hear the most from your readers?
Kimberly: It is interesting. This time of year, people are starting to get their bills for Medicare. We’ve been writing about what they could expect for their premiums to be a few weeks ago, when it was first announced. Now, they’re getting their bills and a lot of them are very surprised that they’re subject to the high income surcharge, and it’s exactly what we talked about. It was some of their withdrawals from tax deferred retirement accounts or some Roth rollovers, and they really weren’t expecting to be hit with that. They’re wondering what they can do. One thing to keep in mind is the high income surcharge is based on the last tax return on file. For 2016, that would be 2014.
If your income has decreased for certain life changing events since then, such as if you’ve been divorced or a death of a spouse or even if you retired since then, you can contact the Social Security Administration and contest the high income surcharge, ask to have it decreased based on your lower current income. Now, like you said before, a Roth rollover doesn’t count. You can’t get your high income surcharge reduced in that year because of that, but if you have retired and your income has dropped because of that reason, and you can provide evidence of your new income, and they’ll ask for evidence from your employer that you retired, things like that, then you may be able to get that high income surcharge reduced. In one of my columns, if you go to kiplinger.com, and you look at the “Ask Kim” column, you can even see a lot of great information about how to get the high income surcharge, how to contest it and how to possibly get it reduced. There’s a lot of information and links there to pages on the Social Security Administration website. That’s all the information you need to provide.
Jason: That’s awesome. Kim, if you’d be so kind, for our listeners under the show notes, we’ll include some of these links to your website. I know that you’ve got a new article out that we’ll be sure to put a link to that’s “How Much Will Your Medicare Part B Premiums Cost in 2016?” We’ll have a link there for our listeners. Any of these additional resources that we can link back to, we’d sure appreciate that for our listeners. They can just go to soundretirementradio.com, and again this is episode 074. This is episode 74 if you’re driving down the road this morning. We’re almost out of time, Kim. I just want one more time if you would, remind our listeners if they want to get more information about the work that you’re doing. Maybe they have a specific question on Medicare. What’s the best way that they can reach you?
Kimberly: Sure. If you go to kiplinger.com and you look for the “Ask Kim” column, and I have a new column that’s posted every Tuesday and Friday. You can also send questions directly to me through the column or even directly at email@example.com. We do have a lot of great resources there. You can also look in our search engine for our Medicare special report. It answers a whole lot of questions about all of these issues.
Jason: Awesome. Folks, if you’re tuning in today, I just want to say thank you, Kimberly Lankford, for being a guest on Sound Retirement Radio.
Kimberly: Thank you very much for having me! I appreciate it.
Jason: You’re welcome. For our listeners, I want to remind you, one of the biggest expenses you are probably going to be looking at in your retirement is your healthcare expense. If you’re going to retire early, we got to figure out how you’re going to pay for those health insurance expenses and healthcare costs in an early retirement. Then once you’ve retired, you really want to understand how Medicare works, how the Medicare supplemental plans work, how the prescription drug plans work. You don’t want to pay too much for any of this. It is getting confusing.
I remember my grandfather, after my grandmother passed away, his health insurance situation changed dramatically. He was in his 80’s, and fortunately he was able to find somebody locally that was able to guide him through some of these tough decisions on Medicare. For those of you that have not yet read “Sound Retirement Planning,” if you’re thinking about retiring in 2016, I want to encourage you, access to good information is going to help you make better decisions. You’re going to have a greater sense of clarity about what’s most important in your life. You’re going to have a greater sense of confidence to know the numbers are going to work. Ultimately, our hope for you is that you live a life with a greater sense of freedom.
If you visit soundretirementplanning.com/radio up until December 31st, we will give you a free copy of my bestselling book on Amazon under the category of personal finance. It’s going to be chock-full of ideas on how to create tax efficient cash flow, how to maximize your social security. Consider doing things like Roth conversions if you’re going to be retiring early and you have some of those opportunities. Again, you go to soundretirementplanning.com/radio for a free copy of your book. We’ll have all of the show notes listed for you online. You’ve been listening to Jason Parker and Sound Retirement Radio episode 074. Thank you for making this program great. This is Jason Parker signing out.
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All insurance related discussions are subject to the claims paying ability of the company. Investing involves risk. Jason Parker is the President of Parker Financial, an independent fee based wealth management firm, located at 9057 Washington Avenue NW, Silverdale, Washington. For additional information, call 1-800-514-5046 or visit us online at soundretirementplanning.com.