IRMAA: Are Medicare premiums going to derail your retirement budget?
By We talk a lot around here about planning for retirement, and for good reason — the decisions you make today have enormous consequences for your quality of life in retirement. So many folks we work with are looking forward to that magical time, but often they don’t consider that, even though working for a paycheck ends, budgeting for regular expenses doesn’t.
One common misconception I hear is the idea that, once you turn 65 and become eligible for Medicare, you’re free and clear on your healthcare costs. In reality, Medicare is just another health insurance plan, and with it come premiums. What’s even more surprising to people is that what you pay in premiums is based on your income in retirement — specifically your modified adjusted gross income (MAGI) from your tax filings. The higher the MAGI, the higher the income bracket you fall into on the income-related monthly adjustment amount sliding scale (IRMAA) that determines your Medicare Part B and Part D premiums. To make matters more complicated, that sliding scale doesn’t line up with the federal tax brackets.
Now you’re probably thinking, “Wait a second. I spent my whole career considering my tax bracket, and now I’ve got to do even more of it in retirement?”
Well, yes and no.
We find that many folks who retire successfully become accustomed to a certain standard of living and monthly income that they’ve earned through discipline and delayed gratification. But that means they may pay a larger premium expense versus their fellow Americans due to higher income levels. For some retirees, that can come as an unwelcome surprise.
So should you keep living modestly to stay in a certain IRMAA bracket and avoid the extra Medicare premiums?
Absolutely not.
I’m a big believer that if you’ve done a great job saving, you should enjoy the assets you’ve worked hard to accumulate. You save money to spend it, whether that’s on yourself or on your heirs. Worrying about a couple hundred dollars a month can sometimes overshadow the purpose of saving for a successful retirement.
That being said, there are some strategies we can evaluate as you determine what premiums you may pay.
For example, your position on the IRMAA bracket is determined by your MAGI from your previous two years of tax returns. Certain lifestyle changes in retirement can really spike that taxable income — things like downsizing a home to move closer to family, doing a large Roth conversion, or selling a long-held stock that’s performed particularly well as an investment. All of these life events could cause you to be in a higher IRMAA income level.
While lumping those large windfalls together in the same year may result in a larger Medicare premium adjustment, in the short term, I consider that it may only be temporary. Moving forward, you may find yourself in a lower tax bracket as income is realized primarily through regular distributions from retirement and brokerage accounts.
While you may say, I only have brokerage and IRA accounts, so I shouldn’t have to worry about this. Not so fast, my friend!
Even if your situation is simple, you may find you are being impacted in later years, as your RMDs (required minimum distributions) move you into a higher income level. Many retirees may eventually be impacted by IRMAA testing limits (read the old 80/20 rule).
I know from working with so many of you that these decisions can take a mental toll. At Family Financial Partners, we pride ourselves on taking these difficult issues, reviewing them in terms of your individual situation, and coming up with a plan designed to align with your goals and priorities as you prepare for retirement.
Whether you find yourself approaching Social Security (62) or Medicare (65), or you’re already in retirement and need some guidance, this is a great time to contact us. And if you’re not quite ready for that conversation yet, consider checking out our free Pre-Retirement Workbook. It can help you start to see your full retirement picture and where you have gaps.
A little advanced planning can go a long way toward helping you manage financial costs in retirement.
Article by David Smyth, Senior Partner and Wealth Advisor at Family Financial Partners — a financial services firm in Lexington, Kentucky.