Episode 220: Why Your Health Insurance Stops Working at 65

Introduction & Chapter 7 Overview

Alex Murguia 00:01

Hey everyone, welcome to Retire with Style. I'm Alex and I'm here with Wade Pfau and we're going through certain areas of Wade's recently revised book, Wade, right?

Wade Pfau 00:15

That's right, yeah, third edition of Retirement Planning Guidebook, going through right now Chapter 7 and the key things people need to know related to health insurance, Medicare in particular, and just health budgeting in retirement.

Alex Murguia 00:30

And last week we discussed the basics of Medicare and the pros and cons of the plans and the like and just even the lexicon of it. Know why a plan, know how parts and plans are different. Part A is different than plan A and you know plan Medigap and the like are similar things. And so today what I want to, what we wanted to go over is just what does the enrollment process look like? Because that can also be daunting. Once you've made sense of everything, of the alphabet soup, what's a day in the life? Okay, I'm turning 65. Here we go.

Medicare Enrollment Process

Wade Pfau 01:10

Yeah, so a couple things. If you did enroll in Social Security early, you'll get signed up for Medicare automatically. But if you're delaying your Social Security benefits, we should point out you do need to make the effort to enroll in Medicare. You can do that online or in person at a Social Security office or even through the telephone.

Alex Murguia 01:31

Describe that a bit because that's also something that I think people lose sight of that. Social security combination with Medicare.

Wade Pfau 01:41

On the enrollments, right, if you're already claiming Social Security, you'll be signed up for Medicare to start you off on the first day of the month that you turn 65. If you have not enrolled in Social Security, and so that's a whole separate topic, but we generally are suggesting most people may not want to be signed up for Social Security when they're 65. In that case, you do need to make the effort to enroll in Medicare. You won't be auto enrolled. And now it's still age 65, but the full retirement age for Social Security is almost to the point of being 67. So they're not the same age anymore. That is, I think, an area where people might make a mistake because they don't realize there is that difference in ages now.

Alex Murguia 02:27

And for the folks listening, I'd rather they hear from you. When you say auto-enroll, does that mean their plan is being selected for them or they're just eligible now to enroll?

Wade Pfau 02:38

They'll be, yeah, I mean, auto enrolled in original Medicare. So if you wanted to choose a Medicare Advantage plan, you better step up and let them know.

Medicare as Primary Payer

Alex Murguia 02:49

That's what I'm getting at. Okay. Alright, so enrollment process. Take it away, my big guy.

Wade Pfau 02:52

Right. Yeah, so Medicare by law becomes the primary payer once you become eligible. And we'll talk about exceptions, but when you become eligible, either when you turn 65 and you can sign up in the three months before the month of your birthday or the three months after your 65th birthday. A couple of exceptions there. You can also become eligible for Medicare if you have end-stage renal disease or after being on social security disability benefits for two years or if you're on Social Security Disability due to having ALS, then you instantly become eligible for Medicare.

Alex Murguia 03:54

Explain that again. Just cause it's worth repeating.

Wade Pfau 03:57

Well, you need basically you're creating a huge risk for yourself of facing the full out-of-pocket costs of any health care event if you are not signing up for Medicare, but you're facing a situation where by law Medicare is your primary payer. Now, if you're still working past 65, we got to kind of dissect this a little bit because here's where the conditions.

Working Past 65: Group Health Coverage

Wade Pfau 03:57

So if you meet these conditions, you don't have to sign up for Medicare. Your existing coverage can be primary payer, but it's the only way to have primary coverage outside of Medicare is if you or a spouse is actively working at a company with 20 plus employees. And receiving coverage through that company or union's group health insurance plan that remains by law as the primary payer. And so you have to be actively employed with the company and you have to be using that company's health insurance. And that's it for having primary insurance after reaching age 65. Now there's one exception to that and that's if you do have retiree health insurance, you work for the federal government and you have the federal employee health benefits program, the FEHB, that's the one exception where that can serve as a primary payer for your health coverage as well. You can still sign up for Medicare if you'd like, but the FEHB is the one exception. But what that really means is we should list off all these other things where you may think you have health insurance, but by law, it's no longer a primary payer.

What Becomes Secondary Insurance

Alex Murguia 05:35

Okay, fire away.

Wade Pfau 05:36

Okay, so maybe you're covered by an employer health insurance plan, but that employer has less than 20 employees, then it's no longer the primary payer once you reach 65. If you're continuing to work, but you're covered through the Affordable Care Act, so you get health insurance through the Affordable Care Act, those are no longer gonna be primary payers, even though you're still working once you reach 65. If you retire, you may be retired, but you receive health insurance through a previous employer. So a retiree health insurance program that, that could work as secondary coverage. So you may not need a supplement, but it's not the primary payer. And again, the only exception is that federal employee health benefits program. If you're using something like one of the health share plans that are, they're not technically insurance, but they behave in that manner, often run through religious organizations, they're not primary payers. There is a version of HealthShare that may work for secondary coverage to replace a supplement, but it's not going to be a primary payer. If you're receiving health insurance as a veteran's benefit or through the military's Try Care for Life program, those are not going to be primary payers anymore. If you're using COBRA to extend an employer health insurance for that period after you've left the employer, that could fill a gap until you reach Medicare eligibility, but it's no longer a primary payer at that point. And then also if you're receiving coverage through Medicaid, that's no longer a primary payer.

Alex Murguia 08:59

I mean, this goes back to cost, then. Obviously you don't want this to happen, but even if you have Medicare and the like, and you're doing a financial plan and you're trying to budget for this and the like, what numbers are we talking about if someone's doing a financial plan that they should put in? And let's assume they're stacked with the proper insurance. Even with the insurance, what would they be looking at?

Healthcare Cost Estimates & Budgeting

Wade Pfau 09:25

Yeah, yeah, so there's various estimates out there. And like when we do the retirement income challenge, we like to use the funded ratio where you put in annual expenses for health care, which are going to vary quite a bit person to person. And Vanguard did a really interesting study where they look at health care expenses and how that varies by choice of supplement, by where you live and the cost of living in that area. And also based on whether you're a high utilization health care user. You visit doctors more frequently or less frequently, or you have certain chronic conditions. But then the number that probably gets the most media attention would be Fidelity every year does a retiree health cost estimate. And in the most recent 2026 report, they're saying that the average couple at age 65 would need to set aside, this is the present value, the $375,000 to cover medical spending throughout their retirement. And that does not include the long-term care. That's simply for health care expenses. And then that's coming from the idea that per person, they're looking at spending at around $6,400 to $6,500 a year.

Alex Murguia 10:36

64 to $6,500 a year. Does Fidelity assume even spending or is it like how we've talked about a lot where you can do that as an average, but the reality is it's going to be a lot more towards the end of your life. There's a of crescendo of spending, if you will.

Wade Pfau 10:39

Per person. Right. The Fidelity study assumes you use original Medicare, but you do not get a supplement. So yes, the out-of-pocket spending is going to grow more dramatically over time as you face more out-of-pocket costs.

Medigap Supplements vs Medicare Advantage

Alex Murguia 11:08

So if by reading your book and you learn the ins and outs of the supplements, if you will, the Medigaps, or even getting a good Medicare Advantage plan, you know, if you're wise about the type of plan that you choose relative to your own personal situation, that can knock off some dollars off of that, correct?

Wade Pfau 11:28

Yeah, that's something that the Vanguard study looks at, where if you're paying for the comprehensive supplement, that's going to increase your costs on average. But in those cases where you'd have a really high cost because you have significant health events that are expensive to pay for, that's where the insurance kicks in. That supplement really provides the value of lowering costs in that tail of potential expenses.

Retirement Styles & Healthcare Decisions

Alex Murguia 11:55

And I think this is, I'm going to throw you a curve ball here, not a curve ball, but I'm going a little off topic, but not too much. With regards to the retirement income style awareness, we point out certain profiles, right? Somebody who's total return, someone who's risk-wrapped, someone who's income protection, and someone who's time segmentation, and that's based on you know, the spectrum of where are you on probability versus safety first and where are you on optionality and commitment orientation. And you've alluded to many times, hey, you know, this can also apply to Medicare decision making. And just listening to you go into, you know, how the Vanguard did it, you know, what I started hearing was, you can cut the tails here off of this thing. Whereas, yeah, it may increase the mean on a yearly basis, but you'll cut off the tails, which will help you overall. If that's your temperament. You want to maybe explain that in a manner that is cogent to this kind of decision making?

Wade Pfau 12:55

Yeah, with retirement income styles, one of the things we see is with retirement concerns, the two primary retirement concerns are, am I going to outlive my money? And then also, am I going to have liquidity for health shocks or long-term care shocks? And if you're on the left-hand side of the recent matrix, which just means you have more of a safety first orientation, you value having protections and commitments in place, that tends to also associate with a true liquidity mindset. Where you don't just think about you have a pot of liquid assets that you'll use whenever you have some expense. You really like to earmark different assets for different purposes. And that sort of mindset will make you much more open to, I'm worried I won't have liquidity for my healthcare shocks. But if I have original Medicare with a comprehensive supplement, or if I have other retiree health insurance that plays the same role as a comprehensive supplement, I'm really reducing that exposure to the healthcare spending shock. I'm locking in this is how much I'm going to pay every year in premiums and I don't have to worry as much about big out of pocket expenses beyond that. That's probably going to be more comfortable having that original Medicare with the comprehensive supplement for folks who are more safety first oriented. And then if you're more probability based oriented, you do have more of a true liquidity mind, not true, you have a technical liquidity mindset where you just value having a liquid brokerage account and you might view the way to have the most funds in your brokerage account is that's where Medicare Advantage might appeal more because it has less premiums and you'll just manage out-of-pocket spending as needed over time, but you're more confident that you'll be able to fund any out-of-pocket spending through the portfolio because you don't, you're not as concerned about having liquidity for health-related shocks.

HSA Strategies for Healthcare Savings

Alex Murguia 14:50

No, I agree, Wade. with regards to that, I'm also thinking our listeners, let's say they're on the younger side and they're a few years from needing to make this decision, and you're talking about the total number being $350,000. What are some ways that they can maybe in a planning standpoint start saving up for that in certain vehicles? And I'm thinking HSA, obviously. What will be your thoughts in terms of that? Because I think it's very realistic and this is where HSAs, I mean they're getting hotter and hotter from the standpoint of being in the people's mind right now of something to do. But the HSA, my take is the HSA presents a great vehicle for someone in the 30s, 40s, even 50s to start saving up because you don't need that account to be $5 million when you retire. But if you can get it to be in say, the $200,000 $400,000 range, that's a huge, huge benefit. That's my take. Your thoughts on that?

Wade Pfau 15:58

Fair enough. You know, if you have an eligible, high deductible health insurance policy, you're allowed to make those annual contributions to the HSA. And that's a health savings account. And they give you the triple whammy of tax deduction on the contributions. It's an above the line deduction, just like if you get deductible IRA contributions or 401k contributions, you get that above the line tax deduction, reducing your adjusted gross income. You get tax deferral for the account. And then if you're taking distributions to pay for qualified medical expenses, that comes out tax free, just like with a Roth. It does not enter your adjusted gross income. So that can be a very powerful way to have some funds available to cover health-related spending in retirement. And yeah, I mean, realistically, if you're a big saver, you could potentially have an HSA by the time you get to retirement, especially if you're getting HSAs may not have been around long enough with high enough contribution limits for folks who may already be close to retirement. But for younger people, the annual contribution limits now are such that you could easily have enough saved in your HSA to fund health expenses in retirement.

Alex Murguia 17:09

100 % and again, you can say, but I got a Roth for that or I have a regular account for that and yeah, you can but don't discount the triple amu which is pre-tax money going in and tax free coming out and then compounds tax free. It doesn't get better than that. And so that one you want to fund with extreme prejudice.

Wade Pfau 17:32

Yeah, and it gives you a way to get those extra tax advantages. Its only downside is it's not a good asset to leave as a legacy to anyone other than your spouse. Because with inherited IRAs, you get a 10-year window to spend them down. With an inherited HSA to anyone other than your spouse, they get a one-year window to spend it down. And it's all taxable.

Alex Murguia 17:50

No, but I get that. But the fact that it's NHSA, you're doing it for health reasons. If you don't use it, fine. But you had it there. And while you were alive, it was serving its purpose, at least from a mental anxiety standpoint. And you're talking the limit is, I believe, 8,500 or something like that for families. So it's.

Wade Pfau 18:10

Yeah, a little higher, but somewhere in that ballpark for families now.

Alex Murguia 18:13

Yeah. Okay, and I got to stop topic with that just because I just wanted to make sure for our younger listeners, listen, HSA is the way to go. take us back to, again, the day in the life of an enrollment process. What do they need to do? Do they need to call up Social Security office? Do they need, do they get something in the mail? What happens in terms of enrolling?

How to Enroll in Medicare

Wade Pfau 18:32

You should, yeah, you should get something in the mail. But you can go to Medicare.gov to get more information. There's always discussion about changes, and so I don't know if this has changed. I'm pretty sure you can still just enroll online. You don't have to go in person, although I'm not sure exactly how that all played out with some of that conversation from last year about changing policies. I think for the most part you can still enroll online. Otherwise, and if you do want to, if you want more help too, there's all kinds of volunteer providers, 800 numbers you can call for more information. And you can call the Medicare offices with an 800 number to get more information about your options and also to ask how you can get enrolled.

Medicare Help Resources & Enrollment Periods

Wade Pfau 19:29

Getting help. So Medicare personnel are available 24 hours a day by phone or counseling. And that phone number is 1-800-633-4227. You can also talk to knowledgeable volunteers through the Medicare Rights Center at medicarerights.org or your state's state health insurance assistance program. And you can find the contact information for your state at shiptacenter.org. And that's S-H-I-P-T-A center, the American spelling C-E-N-T-E-R, dot org.

Annual Enrollment Period & Plan Changes

Alex Murguia 20:07

And then Wade, just something that could cause some confusion. It's based on your age, but why is it that in a certain time of the season you see so many Medicare Advantage ads?

Wade Pfau 20:20

Yeah, because every year you can make changes. So when you become eligible, that's your initial enrollment period. I have a table in the book about how many different enrollment periods. So with Medicare, there's one, two, three, four, five, six, seven, eight, nine, 10 different possible enrollment windows. And one of those is every year from October 15th to December 7th. For those who already using Medicare, you can make changes. You can choose a different Part D plan for prescription drugs. Like we were talking about earlier, you can, if you're using Medicare Advantage, you can switch back to Original Medicare. If you're using Original Medicare, you can switch to Medicare Advantage. You could switch between different Medicare Advantage plans. You've got a lot of flexibility to make those changes every year. With the one caveat being, if you've got a good supplement, it would be risky to give it up because you may not qualify through the underwriting to get that same supplement again. So that's when all the commercials are, because it's usually the Medicare Advantage plans trying to get you to switch over to their private insurance.

Alex Murguia 21:25

And why don't you see as many commercials in the nine other windows?

Wade Pfau 21:31

Well, is no, the nine other windows are more ongoing about, they're different for everybody. It's when you have your initial enrollment window or when you have some trigger for a special enrollment period, which could be, if you were still working and you leave work or if that health insurance coverage ends, or if you had a Medicare Advantage plan that goes out of business mid-year or something like that.

Alex Murguia 21:35

Exactly. Yeah, so there's a bunch of idiosyncratic windows that are specific to you. But the sort of the land grab for insurance companies, for lack of a better word, between October and December. Okay, and that's where you see all those commercials go away.

Wade Pfau 22:07

Right. Once you get past this number seventh, all those commercials go away.

Alex Murguia 22:11

That's the way they wheel out Joe Namath to talk about Medicare Advantage or whatever it is.

Wade Pfau 22:15

Yes. Yeah, he's one of them. And also JJ from Good Times.

Alex Murguia 22:19

Really? Dynamite!

Wade Pfau 22:22

Yeah, he does Medicare Advantage commercials. Who else?

Alex Murguia 22:26

Alright, I don't know. I don't watch TV, wait, I just read. I don't know, you're watching way too much. Yes, yes, and a gentleman. Alright, that's anything you want to cover? You mentioned the potential changes in government laws and things like that. Do you want to get into that now or do you want to save that for another time?

Wade Pfau 22:32

You're a true scholar. Yeah.

ACA Subsidies & Tax Planning

Wade Pfau 22:32

Well, if you're teasing about the Affordable Care Act subsidies, that's probably a different topic because it's really a tax planning conversation that if you're still pre-Medicare. The highlight is with tax claim for retirement, if you're still getting health insurance through the Affordable Care Act, any subsidy that you're eligible for now goes away as soon as you're $1 above 400 % of your federal poverty line, which if you're a two-person household in the continental US is $84,600. That's the 400 % of the federal poverty line. So $1 above that, you can lose more than $20,000 of subsidies. So it's something to be very careful about. But yeah, that's really a whole different conversation.

Conclusion & Resources

Alex Murguia 23:41

Alright, we'll get into that some other time. Alright everyone, so the last two episodes we've covered the ins and outs of Medicare parts and plans and in this one we discussed the enrollment process and how that works and things to keep an eye out for. Anything else, Wade?

Wade Pfau 24:00

I think we covered quite a bit. So we've left people with things to chew on.

Alex Murguia 24:03

Alright. Yeah, and all of those, where can they find out more if people want it to really dig a little deeper?

Wade Pfau 24:12

Yeah, everything we talked about is covered in chapter seven of the Retirement Planning Guidebook, the third edition of which is now available. And if you just go to bookstoreed.com/retirement, you'll be able to find your preferred retailer, whether it's Amazon or bookshop.org for the independent bookstores, Barnes and Noble, they're all available.

Alex Murguia 24:34

And in the irony of all ironies, episode that we devote, the two episodes we devote to Medicare and health related items, Wade has a bad head cold. Why didn't you just know it, huh? Thank you for powering through, Wade.

Wade Pfau 24:46

That's right. You're welcome, Alex, and thanks everyone.

Alex Murguia 24:51

Alright everyone, see you next week on Retire With Style.