No Matter Your Age, Start Medicare Planning Now

MIKE TOWNSEND: It's budget season in Washington, and that means everyone in the nation's capital is talking about government spending, the federal deficit, and how much this program or that program should get in federal dollars.

Of course, while the discussions for next year's budget are just getting started, Congress is racing to finish this year's budget―more than five months after the fiscal year began.

On Capitol Hill, the bickering over how much funding should go to border security or the IRS or national defense or any other agency you can think of, it never really ends. But there are two gigantic programs that aren't part of the debate―Social Security and Medicare. Funding for those programs is already mandated by law.

They are the two largest expenditures of the federal government. In Fiscal Year 2023, more than $1.3 trillion went to Social Security and $839 billion to Medicare. Together, they represent more than 35% of all federal spending.

For most people, Social Security is fairly easy to understand. But Medicare―now there's a much more daunting prospect. It's confusing. It's complicated. It's often overwhelming. And that means people don't pay attention to it until right before the eligibility age of 65. Well our mission that today is to share information on why, when, and how everyone should make Medicare part of their financial planning no matter your age.

Welcome to WashingtonWise, a podcast for investors from Charles Schwab. I'm your host, Mike Townsend, and on this show, our goal is to cut through the noise and confusion of the nation's capital and help investors figure out what's really worth paying attention to. 

Medicare is one of the toughest federal programs to navigate, a maze of confusing choices, odd timing rules, and potential penalties. In just a few minutes, I'm going to talk with Susan Hirshman, director of wealth management at the Schwab Center for Financial Research and our resident expert on Medicare. She does a great job of demystifying the program that I think you will find really valuable.

But first, here are my three things to know about what's going on in Washington right now.

First up, is the federal budget. Congress is scrambling this week to meet the March 22 deadline for the final six appropriations bills to fund government operations for the current fiscal year. This package of bills is massive, and includes the defense bill, which is by far the largest. But it also includes the most controversial bill, the one for the Department of Homeland Security, which has become a proxy for the red-hot debate over immigration policy. Lawmakers reached a deal earlier this week on all six bills and are in the process of getting the package through the House and Senate. Barring an unexpected glitch, Congress will finally finish funding the government for this year.

But while Congress is still wrapping up government funding for this year, President Biden last week unveiled his budget proposal for next year, Fiscal Year 2025, which begins on October 1. Now no one, including the president, expects the first draft of budget to be accepted. This is just the starting point of the process, and Congress is the one that ultimately drafts the budget and passes the appropriations bills. But the president's budget is nonetheless notable as a messaging document, an outline of policy goals and spending priorities that he would advocate for in a second term.

Among the notable tax proposals, most of which have been part of previous budgets, is an increase in the top income tax rate to 39.6% for individuals earning more than $400,000 a year, up from the current top rate of 37%. Capital gains would also be taxed at 39.6% for those earning more than $1 million per year. The president also calls again for his "billionaire's tax," which would create a minimum tax of 25% for households worth more than $100 million, including the taxation of unrealized gains on assets above that level.

On the corporate side, the president calls for increasing the corporate tax rate from 21% to 28% and quadrupling from 1% to 4% the tax on stock buybacks that was imposed in 2022.

Now with the razor-thin margins in Congress, these proposals aren't going anywhere this year. But taxes will be on the front burner next year, because all the 2017 tax cuts are set to expire at the end of 2025, including the current income tax rates, the higher standard deduction, the corporate tax rate, and the amount of assets exempt from the estate tax. No matter who is elected president, those expiring tax cuts will force a Congress that is likely to still be divided to find areas of compromise on taxes in 2025.

Second, the past week or so in Washington has been dominated by debate over TikTok, the wildly popular social media app for short-form videos. At issue are growing concerns that TikTok's Chinese parent company could be sharing the personal data of American users with the Chinese government, and that the app could be a vehicle for China to spread political disinformation.

On March 13, the House of Representatives voted overwhelmingly, 352-65, to force ByteDance, the Chinese internet company, to sell TikTok, or the app would be banned in the United States.

The bill is now headed to the Senate, where it will slow down substantially. Senate Majority Leader Chuck Schumer has not yet committed to scheduling debate and a vote on the proposal, and with Congress heading into a two-week recess for the Easter holiday, this won't get resolved until mid-April at the earliest.

But with an estimated 170 million users in the United States―banning TikTok would be a very big deal.

The politics of this issue are fascinating, with members from across the political spectrum voting for the bill. Former President Donald Trump, who proposed banning the app in 2020, threw a bit of a wrinkle into the debate last week, when he came out in opposition to the ban. President Biden, who supports the ban, is also keenly aware that it could get him in political hot water with young voters who are TikTok devotees. The logistics of the potential ban are also fascinating, with many questions about how a ban on the app would actually work in practice. Expect this one to remain in the headlines for a few more weeks as the Senate wrestles next month with how to proceed.

Third, as I mentioned on the last episode, earlier this month the SEC finalized its controversial climate risk disclosure rule, which requires public companies to disclose more to investors about their greenhouse gas emissions and the risks they face from climate change. The final rule did not go as far as the original proposal, primarily because it backed away from requiring companies to account for the greenhouse gas emissions created by their entire supply chain.

But the final rule pleased exactly no one. Within 48 hours, multiple legal challenges had been filed from across the political spectrum, including three different ones by a total of 13 Republican state attorneys general, arguing that the rule goes too far, as well as one by the Sierra Club, the prominent environmental group, arguing that the rule doesn't go far enough. On March 15, one federal court granted an emergency stay, blocking the SEC from moving forward with the implementation of the new rule.

Now none of this is particularly surprising―this rule was always destined for the courts. But the theme of a regulatory agency finalizing a rule and then immediately seeing it challenged in court is likely to be repeated over the next couple of months. Companies, trade associations, and interest groups have become much more aggressive in challenging regulations in court in recent years, and there are several other rules nearing finalization at the SEC that are likely to be challenged. 

We can expect a flurry of these actions over the next couple of months. Regulatory agencies like the SEC are under pressure to get rules across the finish line because of something called the Congressional Review Act, usually just known as the CRA. It's a law that allows Congress to overturn major rules by a vote of disapproval from both the House and the Senate. It was enacted in 1996, and over the first two decades of the law's existence, it was used to overturn a regulation just once. Since 2017, however, it has been used 19 times. It's particularly useful when a rule is passed late in a presidential administration―if there is a change in control in the White House and Congress, then the new administration can work with Congress to undo those rules from the previous administration. The key date comes in late May this year―any rules passed after that could be subject to the Congressional Review Act in early 2025 if the balance of power changes.

Whether it's the courts or Congress challenging rules, there are several in the queue at the SEC that, like the climate rule, may be ripe for battle. The SEC is expected to finalize controversial rules to overhaul equity market structure, including how retail investor trades are processed, as well as a rule that would restrict the use of certain technologies when an investment adviser provides advice to an investor. There's also a proposal at the Department of Labor to change the definition of who is a fiduciary in the retirement savings context―another rule affecting everyday investors that could be challenged.

I'll be following this in the months ahead as the SEC and other regulators move to finalize rules that could have a big impact on how the markets work―and the challenges those rules could face in multiple arenas.

On my Deeper Dive today, I want to take a close look at a federal program that is important to everyone but can be quite intimidating, Medicare. Medicare is a program that everyone is aware of from their earliest days working, because in every paycheck you see that deduction that goes toward funding the program. But for a lot of workers, Medicare seems really far away, until all of a sudden, you're approaching retirement age, and you realize how much you need to learn about it. The reality is there are lots of reasons to understand Medicare and where all that money is going, no matter your age.

To help me explore the ins and outs of Medicare and the major role it plays in financial planning, today I'm turning to Susan Hirshman, director of wealth management at the Schwab Center for Financial Research. Susan has an extensive background in tax, trust, and estate issues;, financial planning; and she's also a CPA. She has a deep understanding of the details of the Medicare program, which deserves an advanced degree all on its own. Susan, welcome, and thanks so much for joining me today.

SUSAN HIRSHMAN: It's great to be here, Mike.

MIKE: OK, Susan, well, I can remember getting my first job right out of college, and I assure you, the pay was very small. But I also remember getting those first paychecks and being stunned to see just how much had been held out. I expected to pay taxes, but there were deductions I had never really thought about before, Social Security and Medicare. And when you're in your late teens, early twenties, it feels kind of frustrating to be paying into a system that you will only see the benefits of decades in the future. But I think that's really a good place to start our conversation because it's a reminder that we're all paying into Medicare right from the get-go, even as a teenager with a part-time job.

SUSAN: Exactly, Mike. Age has nothing to do with paying this tax, and it doesn't matter whether you work part-time, full-time, or if you're self-employed. With only a few exceptions, just about everyone pays into Medicare.

The Medicare tax is 1.45% of your wages, and your employer pays a matching amount for a total of 2.9%. If you're self-employed, you pay the entire 2.9%. And then for people who are what the government considers high earners, there's an additional 0.9% tax on income above 200,000 for individuals or 250,000 for people married filing joint.

MIKE: Well, paying Medicare tax gets to be a little bit like a frog in a pot of water; it's steadily growing warmer—you just get used to the monthly deductions and you cease to really think about it. So what exactly am I getting for all this money I'm putting in?

SUSAN: You're paying for hospital insurance, what's known as Medicare Part A, and you receive that in your retirement years, right now, age 65 and forward. However, if you do become disabled and you qualify for Social Security Disability benefits, or if you have ALS or end-stage renal disease, you may qualify for Medicare prior to age 65. In 2023, about 11% of all Medicare recipients were under the age of 65.

MIKE: Well, that certainly feels like a long way down the road for a lot of our listeners, but speaking with my Washington analyst hat on, everyone who is earning a paycheck and paying into Medicare should keep their eyes on what's happening with Medicare and Washington. Just last week, in the president's budget proposal, he called for increasing the Medicate tax from 3.8% to 5% for people making more than $400,000. That's not going to happen in a divided Congress, but it's very much on the table next year, depending on how the election goes. Funding for Medicare is always a hot potato issues because the program is projected to run out of money by 2031, and this tax increase proposal is one of the options for shoring it up. So the decisions made in Washington now can have some very long-term effects that will matter to even young earners in the coming years.

But Susan, I'm guessing that you have some additional reasons for younger people to be thinking about Medicare before we get start getting close to signing up for Medicare benefits.

SUSAN: Yeah, I think there's three key reasons to pay attention. First, as we mentioned, you're paying for it. Second, is your parents. And third, is financial planning. Here's the deal. As we said, from your first paycheck to your last paycheck, even if you work past age 65, you are paying for it. And if you live long enough, there's a high likelihood that at some point you will need this coverage. And Mike, as you just illustrated, it is so important to understand what is going on in Washington and to be an advocate for yourself.

The second reason is that many people become responsible for their parents' healthcare management and costs over time. In fact, according to a recent study by the National Alliance for Caregiving and AARP, they find that caregiving spans all generations. There's approximately 48 million caregivers in the U.S., and 6% of that 48 million are Gen Zers, and 23% are Millennials. That's a lot of young people with, I'm sure, a lot of unexpected responsibility.

So you may not only become the caretaker for your parents' healthcare, but you also may be in charge of their financial care, and that makes it critically important that you understand how their Medicare policies work. Each year, between October and early December during what's known as open enrollment season, people have the option of changing their choice of Medicare plan. If you haven't already, it is a great time to ask your parents about these choices, the reasons behind them, and then help them evaluate if they would benefit from a change. 

It's also really important to keep in mind that Medicare does not cover long-term care expenses. Medicare deals with medical expenses—doctor visits, hospitals, and so on. Long-term care deals with activities of daily living—things like bathing, dressing, toileting, think custodial. These are two very different concepts and two very distinct costs. And you should have a conversation with your parents and understand their plans for both types of costs.

And the third is to remember that healthcare costs are a big part of spending throughout our lives and should be part of any financial plan. I want to take a minute here and talk about health savings accounts, one of my favorite things. Now, these aren't affiliated with Medicare, but they do allow workers who have a high-deductible health plan to contribute to them and grow savings tax-free to be used for medical needs. This is a huge opportunity, especially for younger workers because of the power of compounded growth. While the funds can be used throughout your life, there's a huge payoff in retirement when the funds can be used to pay your Medicare premiums and to cover costs that Medicare does not. 

I do believe that the message of HSAs is starting to get out there. According to a recent study by Schwab, 48% of Millennials and Gen Zers who were offered the option to contribute to an HSA have opted in. Good news, but there is still more work to be done to get more people to realize what a valuable tool these accounts can be.

MIKE: Yeah, I'm a big fan of health savings accounts. I have one. And I think if you have one and you can make contributions, and then not use it for too many expenses, maybe only big, out-of-pocket expenses, you can really see the power of that growth over time and have a really nice nest egg for medical expenses later in life.

So what about our listeners that are, say, in their fifties? Are there specific things for them to think about when it comes to Medicare?

SUSAN: You know, I would say that it's the same three reasons that we just spoke about, but perhaps with more emphasis and mindfulness. You really need to lean into the financial-planning process and project out what your expenses will look like now and in the future, and then how best to prepare. And don't forget about your parents' situation, as their Medicare decisions can, as we said, affect your own pocketbook, especially as they age and especially if they did not plan correctly. A common occurrence that we see is that some parents tend to choose the least expensive Medicare coverage, and then as they age and have much higher out-of-pocket expenses than expected, the adult child often has to pick up the slack. Here, again, keep that open enrollment period in mind and help your parents revisit the selections to see if their circumstances have changed and if a different plan would be better for them. 

But remember, the Medicare does not cover long-term care costs. So if your parents didn't properly plan for those, those costs may be on you as well.

And since I mentioned long-term care, I really would be remiss if I did not say to anyone in their fifties who is listening, if you're concerned about your own long-term care costs and you're contemplating insurance, investigate it, research it, do it now. Once you reach your mid-sixties, it may be too late to get the long-term care insurance that's best for you. By doing some financial-planning scenario analysis in your fifties, I truly believe it can help you make better informed decisions about your situation and have a more successful retirement later on. If you haven't done any scenario analysis or you haven't looked at your plan in a while, I really urge you to reach out to your advisor and do so.

The bottom line is that it's really important to understand how both your own and perhaps your parents' healthcare costs can influence the timing of and your lifestyle in retirement. Please, plan now. Don't procrastinate.

MIKE: Yeah, your point about long-term care is one I'm really passionate about. Both my parents needed assisted-living-type care facilities in the final years of their lives, and they had long-term care insurance that covered a huge portion of those costs. I truly believe that their foresight to have purchased long-term care insurance was one of the greatest gifts they gave to me and my three siblings. Now my wife and I are talking about doing the same thing to be able to provide that security to our kids. So really important, and I really echo your urging of people to look into that.

Well, back to Medicare. The next big milestone is when you are getting close to age 65. The process of enrolling in Medicare, notoriously overwhelming. So what are the options available?

SUSAN: Yeah, can be overwhelming for some. My brother-in-law, who is really a smart guy, he told me he had to come home, lie down, and put an ice pack on his head when he was doing his enrollment for Medicare. So it can be overwhelming, and that's why we really do suggest that you do some work at least six months prior to turning 65. Familiarize yourself on the basics―the different parts, the costs, the terms, etc.

There are four basic parts that you should be aware of. Part A is hospitalization. Part B is outpatient services―doctors, labs, and so on. And Parts A and B, that is known as original Medicare, and that's sponsored by the government. Part A, for most, has no cost. Part B has a cost that is the same for all. However, depending on your income, you may be charged a little more.

Part D is what's known as the drug plan. That's sponsored by private insurance companies, and cost and coverage can vary.

Part C is Medicare Advantage Plans, which, in essence, combines all these plans into one and sometimes has added benefits, such as network gym memberships, glasses, some dental work. These are also sponsored by private insurance companies, and costs and coverage can vary.

Another plan that is not a part is what is known as a Medicare Supplemental, or the Medigap policy, and that covers out-of-pocket costs for Medicare Part A and B, things like deductibles, copays, and co-insurance. These plans are sponsored by private insurance companies as well. The policies are standard, but they can be priced differently. Do your research.

Schwab.com has some great articles, as well as medicare.gov has lots of information to help sort this out for you.

MIKE: So once we're sorted through these parts, what do we have to keep in mind as we enroll?

SUSAN: There are two key items that you have to consider regarding when and how to enroll in Medicare. The first is the timing of you collecting Social Security, and the second is your current ongoing healthcare if you or your spouse work past when you turn 65. It's really important to get this enrollment thing right, because if you get the enrollment timing wrong, meaning you sign up later than you should have, you subject yourself to lifetime penalties, meaning higher monthly costs for your life in both Parts B and/or part D. I have a friend whose father took very minimal medication and decided he was not going to sign up for the Part D drug plan. Then, surprise, a few years later, he was hit with a chronic illness, and then he had to enroll in a Part D plan. And now every month going forward, he has a penalty which is added to his monthly premium for his chosen drug plan. You know, these penalties can add up to a lot of wasted dollars over time.

MIKE: Well, you mentioned the timing of Social Security. Why is that important?

SUSAN: You become eligible for Medicare at age 65, and if you are already collecting Social Security, when you turn 65, you will automatically be signed up for Parts A and B. That's the hospital and the outpatient services. And then you just need to decide your overall plan structure, which we'll talk about in a few minutes. But if you are not collecting Social Security and you want to enroll in Medicare Part A and B, you have to go to www.ssa.gov/medicare/sign-up, and do just that, sign up.

If you decide to continue working past age 65, that's where things can get a little spicy in terms of the timing of enrollment. And here's why. If you decide to continue working past age 65, and you work for an organization with 20 or more employees, and you stay on that employer health plan, you can delay enrolling in Medicare past age 65. Many people who continue to work after 65 still decide to sign up for Part A, as it's free. And if you have large hospital expenses, it will pay secondary to your employer plan. But if you want to continue to contribute to an HSA during those post-65 years and continue with your employer plan, you should not sign up for Part A. Contributing to an HSA requires that you have no Medicare coverage at all. If you're still working past age 65—or retired, and you're covered by a spouse's large employer plan—the same rules apply, except your coverage has no effect on your spouse's ability to contribute to their own HSA.

And, you know, Medicare, as we mentioned, is more than just Parts A and B. It includes Part D, a drug plan. If you're going to work past 65, and you're covered by a large employer plan, ensure that it includes a credible drug coverage. If not, you would have to sign up for a Part D plan to avoid that lifetime late penalty.

I think you could see why that ice pack was needed, and we're not even up to choosing the plan yet. So, in essence, signing up is the easy part, but deciding upon what Medicare coverage is best for you, that's where it takes a little bit of analysis and evaluation.

MIKE: Well, I'm not sure you've convinced me that signing up is the easy part. It clearly requires some consideration. But when it comes to the plans, what are the options, and what are the difference between these plans? I guess, probably most important, why choose one over the other?

SUSAN: You basically have two choices for Medicare coverage. Choice one is original Medicare, that Part A and B, plus Part D, the drug plan coverage, plus a Medicare Supplemental policy, or your second choice is a Medicare Advantage Plan, that all-in-one plan. And keep in mind, no matter what plan you choose, you still have to enroll in Medicare and sign up for Parts A and B.

The difference between the two is really in who delivers the care and where you receive that care. With an original Medicare, you can go to any hospital or doctor that accepts Medicare, and according to the Kaiser Foundation, 99% of doctors accept Medicare. And of those, 83% are accepting new patients. So your choice with Medicare is vast. However, when you use a Medicare Advantage Plan, these are network plans, meaning that you can only go to specific doctors, hospitals, pharmacies in a specific area as dictated by the plan. The decision about which plan to go to is really specific to each person.

And also keep in mind that Medicare is per person, so spouses do not have to have the same plans. And often if they have different healthcare needs, they, in fact, choose different plans.

So when deciding which plan do you want, we tell our clients to think about the three c's—cost, care, and lifestyle considerations.

Cost. So generally speaking, Medicare original plus supplemental policies tend to have higher premiums and less cost-sharing, whereas Medicare Advantage plans tend to have lower premiums and higher cost-sharing.

Then care. Do you have a preference for specific doctors, specialists, hospitals, pharmacies, and are they in that network? And also, don't think only about today. Also think about your potential health concerns in the future. We say this because depending on the state you live in, if you go with Medicare Advantage first, then you want to switch to an original Medicare plus a supplemental policy, you may be subject to underwriting on that supplemental policy, which may mean increased costs and possibly even being denied coverage.

And then, lastly, is lifestyle considerations. If you live in a different area during different times of the year, would the network be the same? Do you live in a rural area? Is the network big enough to meet your needs? We tend to see people use Medicare Advantage plans more heavily in urban areas than we see it being used in rural areas. 

The bottom line is take the time to evaluate and understand your options.

MIKE: Well, let me focus for a minute on one of those c's, cost. That really brings us to one of the many confusing Medicare acronyms, IRMAA. It's kind of a pleasant-sounding thing, but it is anything but. So please bring us up to speed on what the Income-Related Monthly Adjustment Amount is, who it hits, and how it works.

SUSAN: I'm so glad you asked me about this―because it is often an unexpected, not so happy surprise for many people―and there are a few common areas where we see some misunderstanding.

IRMAA is as its name implies—it's an added monthly cost for Medicare parts B & D. The adjustment or added expense is based on your income. 

It applies to single people whose modified adjusted gross income is greater than $103,000 for 2024 and $206,000 for couples. For Part ,B your total premium cost in 2024 can range from around $175 to as high as $594 a month.

For part D, the IRMAA could be as much as an additional $81 per month on top of your plan premium. Keep in mind that each spouse who is on Medicare is subject to IRMAA.

But here's the deal, no matter which plan you choose, either original Medicare plus the supplements or the Medicare Advantage Plan, you are still subject to IRMAA. So no matter what plan, you have to pay it. And then secondly, IRMAA is based on its own definition of modified adjusted gross income. It includes muni bond income and the taxable portion of your Social Security.

And then also it's really important to understand that your modified adjusted gross income is calculated each year, but it's based on your tax return from two years prior. So for example, if you sign up for Medicare in 2024, your IRMAA will be based on your 2022 tax return that shows your modified adjusted gross income. 

But what happens if there's a change in your life, and that tax return from two years ago doesn't really reflect your current reality? You can appeal. You can appeal the Social Security Administration to see if you can get your IRMAA lowered to reflect more of your current situation. It does work.

And then, lastly, IRMAA effects should be considered in your planning strategies, especially when you're considering adding income to your situation, like, for example, a Roth IRA conversion or taking a qualified distribution. People often forget about this in planning, and then when they get a change in their IRMAA, they are surprised and, dare I say, very cranky. So work with your advisor to understand your situation and how IRMAA will impact you.

MIKE: OK, Susan, this has been great. I've enrolled. I've chosen my plan. Is it smooth sailing from there on? Is it a one-and-done kind of thing, or do I need to consider how things have changed for my situation each year?

SUSAN: It's definitely not a one and done, though many people think of it that way, and, unfortunately, it can lead to unexpected surprises if they're not paying attention. Every year, if you are on a Medicare Advantage Plan, you should check to see if any of the costs, the care, or the coverage has changed. Remember, doctors drop out of networks, hospitals do, pharmacies do, your health changes, and so on. And also, no matter what plan you have, always check your drug plan. Look at what's known as the formulary. It can change from year to year, and you want to make sure that the drugs you take are on your plan in the form that you want. Remember, you can do this every fall from early October through early December during the Annual Enrollment Period. You'll know when that time comes because your TV will be flooded with healthcare insurance commercials.

MIKE: Well, Susan, I feel like we've covered a lot of ground here, but on the other hand, I'm sure we've just scratched the surface, and a lot of questions may still linger. So where can listeners get more information?

SUSAN: As we mentioned earlier, Schwab.com and Medicare.gov are two really good places to start. And of course, please reach out to your advisor with your questions.

MIKE: Well, Susan, you've given us a great help in navigating the very confusing Medicare world. I feel a little bit smarter already but thank you so much for taking the time to talk with me today.

SUSAN: It's been my pleasure, Mike.

MIKE: That's Susan Hirshman, director of wealth management at the Schwab Center for Financial research.

Well, that's all for this week's episode of WashingtonWise. We'll be back with a new episode in two weeks. Take a moment now to follow the show in your listening app so you don't miss an episode. And if you like what you've heard, leave us a rating or a review—those really help new listeners discover the show. 

For important disclosures, see the show notes or schwab.com/WashingtonWise, where you can also find a transcript. 

I'm Mike Townsend, and this has been WashingtonWise, a podcast for investors. Wherever you are, stay safe, stay healthy and keep investing wisely.