Personal Finance

3 Medicare Mistakes That Could Be Costing You a Fortune

Worried Senior Man Portait Getty
Worried Senior Man Portait Getty

There are few programs that are more important for seniors than Medicare. And the role it plays in ensuring the health and financial well-being of older Americans is only expected to grow.

Image source: Getty Images.

On one hand, the older American population is expanding at a phenomenal rate on account of improved health education, diagnostic tools, and pharmaceutical products. The U.S. Census Bureau predicted that the number of elderly Americans would roughly double to 83.7 million from 2012 to 2050, while the number of people aged 85 and up would more than triple by 2050. Living longer than ever gives Americans a chance to thoroughly enjoy their retirement and pursue their passions.

On the other hand, older Americans are often sicker than other age groups, meaning Medicare is readying to deal with an incredible strain in the coming decades. And for seniors, a longer life span also means a higher likelihood of incurring major medical expenses that they may not have planned for.

These Medicare mistakes could cost you a fortune

Ultimately, this means consumers need to be especially vigilant before and after retirement to ensure that they can afford their medical expenses during their golden years. How, you ask? By avoiding the following three Medicare mistakes, which can wind up costing a fortune.

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One of the biggest errors seniors can make is assuming that their current prescription drug plan, also known as Part D, will be the best value going forward.

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1. Setting and forgetting Plan D

The costs of prescription drug plans, which are offered by private insurance companies approved by Medicare, can change substantially from year to year. Your share of prescription drug costs, which pharmacies you can use, and even your eligibility to be covered for certain medications, are far from set in stone. This means if you're in the habit of simply sticking with your plan without doing your homework, then not only could you be overpaying, but you could be enrolled in a plan that isn't suited for your medical needs.

The solution is pretty simple: be an active participant in your medical care. Shop around and analyze your various Plan D options, and keep in mind that the cheapest plan may not be the best plan for you. The more homework you do, the healthier you and your finances are likely to be.

Also consider your options for obtaining financial assistance. The Centers for Medicare and Medicaid Services is quick to remind seniors that national-, state-, and pharmaceutical-based programs are available that could lower or eliminate the out-of-pocket costs of prescription drugs for seniors with low to moderate income.

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The second mistake Medicare-eligible members make is failing to compare original Medicare and Medicare Advantage, also known as Plan C, to see which one is the better value for their medical needs.

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2. Not comparing original Medicare versus Medicare Advantage

"Original Medicare" has been around for more than 50 years, and it consists of Plan A (hospital insurance), Plan B (outpatient services), and Plan D (prescription drug coverage), which is purchased separately. One of the biggest advantages of original Medicare is that well over 90% of hospitals and physicians throughout the country accept it, meaning your doctor is probably in your network. You also don't need referrals to see a specialist with original Medicare, which can expedite your treatment process.

The downside? Original Medicare has no out-of-pocket annual limits, meaning expensive treatments could wind up costing you a pretty penny. Out-of-pockets costs for the consumer are often around 20%. Medicare also doesn't cover basic hearing, dental, or vision services, so you'll need to look to private insurers if you want that sort of coverage.

Medicare Advantage is the alternative to original Medicare that's offered by private insurers. Medicare Advantage plans offer the same coverage you can purchase with original Medicare (Part A and Part B), but they also roll a Part D prescription drug plan, along with hearing, dental, and vision coverage, into one package for the consumer. Additionally, the 2016 Medicare Advantage plan limit for out-of-pocket expenses is $6,700 -- far from the catastrophic costs seniors sometimes rack up under original Medicare. Note that prescription drug costs do not count toward this out-of-pocket limit.

The downside to Medicare Advantage plans is that because they're offered by private insurers, your network could be smaller or could change frequently, meaning your primary care physician may not be included. You could also be required to obtain a referral before seeing a specialist.

If you don't do your homework to see which plan best suits your medical needs, then you could be paying far more than you need to.

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A final Medicare mistake that could cost you is not preparing a retirement withdrawal plan long before you hang up your work gloves for good.

Image source: Getty Images.

3. Not having a retirement withdrawal plan in place

Saving up for retirement and investing wisely is a lot of hard work, and we'd like to think that when we retire, that hard work ends. Unfortunately, your income and your budget will change when you retire. If you haven't laid out a plan as to how much money you plan to withdraw each year from your retirement accounts, then you run the risk of not only burning through your nest egg and outliving your money, but also inadvertently increasing your monthly Medicare premiums.

While it's not a well-known fact, wealthier individuals and joint-filers pay more for their Part B and Part D premiums than lower-earning retirees. Individuals earning more than $85,000 annually, along with joint-filers bringing home more than $170,000, face Medicare surcharges. If you aren't paying attention to withdrawals from a 401(k) or the sale of stock from a personal investment account, then you could inadvertently push yourself over this annual income limit and add surcharges to your monthly Medicare premiums.

There are two fairly simple solutions to consider. First, have a withdrawal plan in place! Estimate what your expenses will be during retirement and plan how you'll withdraw money from your retirement accounts during your golden years. A withdrawal plan should keep you safe from nasty tax surprises.

Secondly, strongly consider using a Roth IRA to your advantage. A Roth IRA allows your money to grow completely tax-free for life, assuming you fall under the income limitations to contribute. Not only will a Roth IRA provide extra income during retirement that can help you pay your share of medical expenses, but eligible withdrawals from a Roth IRA do not count toward income earned. This should help you stay below the income limits that would trigger a Medicare surcharge.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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