OWhether you are a W-2 employee or self-employed, you contribute Social Security and Medicare with every paycheck. For W-2 earners, 6.2% of your salary — up to a limit of $147,000 in 2022 — goes to Social Security, while 1.45% goes to Medicare. Your employer is taxed at the same rates.
If you are self-employed, you are both the employer and the employee, so you are taxed twice that amount. That’s 12.4% for Social Security (up to the same limit) and 2.9% for Medicare (without limit) for a combined payroll tax rate of 15.3%.
After a lifetime of hard work, you get that money back in the form of monthly Social Security payments that kick in at age 62 and Medicare benefits that start at age 65. Although you may have heard that Medicare Part A is free, that’s only partly true. Although the prime is free, this part of Medicare still charges deductibles and coinsurance — all of which are out-of-pocket costs that you’ll have to pay for yourself.
Medicare Part A: Only the premium is free
For most retirees, the Medicare Part A premium is free, which is why it is often referred to as “Part A without premium.” This part of Medicare provides hospitalization insurance, which covers medical services such as hospital care, home nursing, skilled nursing, hospice, and home care. Part A also covers surgery, lab tests, and other procedures associated with these health services.
To benefit from Medicare Part A for free, you must have 40 work credits, equivalent to 40 quarters or 10 years of work during which your income was subject to payroll taxes. If you have worked less than 10 years, you will have to pay for Part A. Non-working spouses can also get Part A at no cost if their spouse has met the work history requirement.
Your exact premium will depend on the length of work. If you worked between 30 and 39 quarters, you will pay $274 per month in 2022. If you worked less than 30 quarters, you will pay the full premium of $499 per month.
The Part A Franchise
However, even if you qualify for premium-free Medicare Part A, remember that you will still be responsible for cost-sharing costs, including deductibles and coinsurance.
To start, each Medicare Part A enrollee is subject to a $1,556 deductible in 2022. This is the amount you must pay out of pocket for each benefit period before Medicare coverage kicks in. and it is due in addition to what you pay in premiums, if any.
A Medicare benefit period is defined as the time between the day you are admitted to a hospital or nursing facility and the day you are discharged. A new benefit period begins if you have not received treatment in a hospital or residential care facility for 60 consecutive days.
It’s important to note that unlike deductibles charged by employer-sponsored, market, or private insurance plans that you might be used to, the deductible associated with Medicare Part A is not an annual deductible. Instead, you must pay the deductible for each new benefit period, which may be several in a single year.
Part A coinsurance costs
After reaching your deductible, you will owe a daily coinsurance amount during each benefit period. From the 1st to the 60th day of each benefit period, you will owe $0. Between days 61 and 90 you will owe $389 per day, and after day 91 you will owe $778 per day.
Each day beyond the 90th day of a benefit period will eat away at a “lifetime reserve day”, of which you will have 60 in your lifetime. If you run out of Lifetime Reserve Days, Medicare will no longer cover your costs and you will be responsible for all bills after the 90th day of that benefit period.
Paying for your medical care in retirement
Medicare Part A deductibles and coinsurance costs can easily run into the thousands of dollars per year. If you experience a long hospital stay, your out-of-pocket costs can run into the tens of thousands of dollars. In general, expect to spend about $1,000 per month on healthcare costs at age 65 and about $3,000 per month at age 85.
Fortunately, you can plan and budget for these expenses. For example, if you had a High Deductible Health Plan (HDHP) and contributed to a health savings account (HSA) during your working years, you could tap into these funds to help offset some of your health costs in retirement.
If your employer offers retirement insurance, you will have access to a second health insurance policy that can help cover more of your personal expenses. Likewise, if you delay retirement or work part-time after retirement, you may be eligible for benefits like an employer-sponsored health insurance plan, which may help cover some of your costs.
Of course, you can also purchase insurance to help supplement Medicare coverage at your own expense. Companies like UnitedHealth Group (NYSE:UNH) and humane (NYSE:HUM) offer plans that can be combined with Medicare to provide more comprehensive health coverage.
Having a good idea of how much you can expect to spend on medical care is an important first step towards health and well-being, both physically and financially.
The $18,984 Social Security premium that most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help boost your retirement income. For example: an easy trick could earn you up to $18,984 more…every year! Once you learn how to maximize your Social Security benefits, we believe you can retire confidently with the peace of mind we all seek. Just click here to find out how to learn more about these strategies.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.