Posted on 29 September 2010
By Mark Miller
Q: I’m 66 and just started receiving Social Security. I have COBRA health insurance for 18 months, and the Social Security people told me that I would have to sign up for Medicare Part B within (eight) months of starting Social Security or else risk a penalty. The COBRA plan from my company is very high-end; it covers out-of-network (doctors) and drugs, costs only $450 per month and is accepted everywhere. It looks better to me that Medicare. An insurance broker told me I would not have sign up for Medicare until COBRA ends and there would be no penalty. Which is correct?–P.W., via the Internet
A: If you don’t sign up for Medicare during that eight-month eligibility window, you will probably face a late-enrollment penalty after COBRA expires. Part B premiums can rise as much as 10 percent–permanently–for each 12-month period that you were eligible but didn’t enroll.
“Failing to sign up for Part B also creates a bit of a domino effect,” adds Adrienne Muralidharan, senior Medicare specialist at Allsup, which provides Medicare and Social Security advisory services. “After your initial eligibility, you cannot sign up again until the next general election period, and you may wind up paying a penalty if you’ve been 12 months or more without Part B. Then, once you have Part B, you must wait an additional time period to sign up for Part D, which carries additional penalties.”
Muralidharan adds that any dependents on COBRA who aren’t eligible for Medicare can continue to use the COBRA coverage for the maximum time allowed (36 months), even if you move to Medicare.
Q: I enjoyed your recent column about the pros and cons of taking early Social Security benefits as opposed to postponing them for a larger benefit later.
In my case, when I retired in 1993 at age 62 I signed up right away for Social Security to supplement my not-too-large company pension. It was either that or taking money from my savings or investments to make up the shortfall, which really made no sense to me, plus the uncertainty of my longevity.
Am I missing something, or is it just so obvious that it’s never mentioned in articles that savings would have to be ‘tapped’ when individuals don’t take Social Security benefits early on?–B.B., via the Internet
A: Your situation illustrates why there’s no “one size fits all” answer on the timing of a Social Security filing. For example, some people may delay by working longer; others don’t–or won’t be able–to do this. And of course, living expenses and savings levels vary.
But the key issue to consider here is longevity risk–running out of money in old age. And that’s where Social Security plays a critical role. Spending some of your savings early to “buy” higher Social Security payments down the road can be a smart strategy.
“The biggest concern most of my clients have when they retire is running out of money when they are very old,” says Jeff Kostis, of JK Financial Planning in Vernon Hills, Ill. “The question should be, how much value is received from the ‘purchase’ of additional Social Security benefits when you delay the starting point?”
Taking a part-time job to boost income offers one route to reduce pressure on savings before filing for Social Security. “Another option–for married couples–would be for one spouse to continue working or begin taking Social Security while the other waits until as late as age 70 to start,” adds Christine Fahlund, vice president and senior financial planner at T. Rowe Price. “Taking Social Security ‘spousal benefits’ may also be possible, allowing one spouse to delay taking their own benefits, while electing to take Social Security ‘spousal benefits’ based on their spouse’s work history.”
Q: Thanks for all the interesting information on Social Security. There is one more aspect that drives more of us baby boomers to file early, and that is a fear that our congressional leaders will once again change the rules midstream and we will be forced to accept something less than what we may already have. The overall lack of confidence in our Congress is at historic levels.–G.R.. via the Internet
A: Worries that Washington will pull the rug out from under us are unfounded, in my view. Congress has never implemented big changes in Social Security without a long lead time; for example, the rise in full retirement age from 65 to 67 was approved in 1983 but scheduled to occur very gradually over a 22-year period. Doing otherwise would be political suicide.
Q: Your recent column on health care reform and seniors appears to downplay the impact of reducing the reimbursement to Medicare Advantage Plans. I have many friends who’ve chosen a Medicare Advantage plan, which restricts their use of doctors, but avoids the cost of a supplemental plan. Don’t you think that when the “big subsidy to insurance companies” is eliminated the cost is going to be passed along to the Medicare Advantage policy holders, who in many cases are the least able to afford it?–C.L., via the Internet
A: Medicare Advantage premiums are projected to dip by 1 percent in 2011, the first full year of health care reform. The Medicare system is pressuring insurers to keep rates down, but this also reflects the fact that the Advantage market is competitive–and lucrative for insurance carriers. While we may see some services cut–such as gym memberships–the new law also includes some important new incentives to plan providers to meet certain quality standards, so it actually aims to generate a “race to the top” in services.