New Retirees: Avoid Costly Medicare Sign-up Mistakes

To retire is to enter the unknown.

Rick Fine has demystified one aspect of retirement: Medicare. As the director of financial planning for an advisory and investment firm, he has put together a list of what he sees as the five biggest mistakes new retirees make.

I encourage you to read Fine’s well-written and detailed article about his five mistakes. Here are a few of the high points.

Mistake #1: Thinking Medicare is free. It’s a great program but it will cost you $174.70 a month for Medicare’s Part B premium – and much more if you have high income. The Part A hospital coverage and Part B for physician services also have deductibles, as do some of the insurance policies that fill in the holes Medicare doesn’t cover.

See Fine’s nifty chart, which clarifies the various cost tradeoffs between choosing a Medicare Advantage policy and a Medigap policy paired with a Part D drug plan. For example, the annual out-of-pocket limit for medical care under an Advantage insurance policy is $8,850 in 2024.

Advantage plans tend to have low or no premiums and usually include drug coverage, he said, which works nicely for healthy retirees. Although buying Medigap and a Part D plan means higher premiums, the ongoing costs are more predictable as retirees age and need more care.

But if the question is whether Medigap or an Advantage plan is cheaper, “there’s no clear-cut answer,” says Fine, whose firm, Sensible Financial Planning, has offices outside Boston and in San Diego.

Mistake #2: Enrolling late. Late enrollment in Parts A and B will add a penalty to your monthly premium – for life! “The later you enroll, the heavier the penalties,” Fine explains. Individuals are permitted to sign up for Medicare any time in the three months before turning 65 but the coverage typically won’t start until the beginning of their birthday month.

Workers over 65 are exempt from late penalties if they have health insurance from an employer with at least 20 employees. Check with your employer to see if the plan qualifies under this Medicare exemption. Once an employee retires, he has up to eight months to enroll in Medicare Part B before penalties will be imposed. But most enroll right away so they are covered.

Mistake 3: Not signing up for a prescription drug plan.

New retirees may not be aware that they might also pay a late penalty if they do not sign up for drug coverage either embedded in their Advantage plan or in a separate Part D plan.   

Mistake #4: Failing to review your insurance policy annually.

Retirees in one survey said they are more likely to comparison shop for groceries and gas than for an insurance policy. But Fine notes that what’s covered is as important as the cost of the plan. The medical services and drugs that are covered by the plan can change, the doctors in an Advantage plan network can change, and new plans are always coming on the market. A different plan might also be less expensive than your existing one or might provide better coverage.

A decision about what to choose depends not only on your healthcare needs now but in the future.

Fine has assembled an excellent checklist of the potential changes from year to year in each type of policy. Medigap plans typically just change their premiums – not their benefits, which are dictated by federal Medicare rules. But Advantage and Part D plans can change virtually every aspect of your policy every year.

Mistake #5: Assuming pre-existing conditions don’t matter.

If you want to enroll in a Medigap plan, your only guarantee of being permitted to buy a policy is when you first sign up for Medicare. After that, the insurers that sell Medigap policies can assess a new applicant’s health and determine whether it is willing to underwrite the policy. Starting retirement with an Advantage plan may jeopardize the ability to switch to Medigap later.

Only four states – Connecticut, Maine, Massachusetts, and New York – allow retirees to move in and out of Medigap plans over time under their state’s “guaranteed issue” policies. Some other states allow it in particular situations.

Contact your state’s free counseling program for specific questions. And again, take a look at Fine’s column and cost breakout for each plan.

Despite Medicare, healthcare is a major expense during retirement. Controlling these costs requires understanding the rules.

Squared Away writer Kim Blanton invites you to follow us @SquaredAwayBC on X, formerly known as Twitter. To stay current on our blog, join our free email list. You’ll receive just one email each week – with links to the two new posts for that week – when you sign up here.  This blog is supported by the Center for Retirement Research at Boston College.