Retirement planning usually starts with the same questions: How much do I need? When can I stop working? Will my money last? But there’s one factor that quietly shapes every one of those answers: your health.
The cost of healthcare will play a major role in your long-term planning yet this particular cost is hard to pin down—who knows how long you’ll live or how healthy you’ll be in the advanced ages? The best you can do is think through the possibilities and understand your options, specifically when it comes to paying for Medicare. A good financial advisor can help you navigate this path successfully according to your situation. In the meantime, here are some things you can begin thinking about on your own to cultivate a mindset of tax-efficiency when it comes to incorporating the cost of health care into your long-term planning.
Need help strategizing on how to keep your Medicare costs in check? Let’s talk!
Why Planning Around Longevity Is So Complex
Aside from the fact that future health care costs are hard to predict, the biggest factor in long-term financial planning is naturally the most ambiguous one: How long will you live?
It’s nearly impossible to make a correct guess but that doesn’t stop financial planners from trying. It’s not unusual for us to ask clients how long their parents lived or whether there are any hereditary conditions in their family that might impact them. In the end though, most financial planners tend to overestimate your lifespan because they want to be sure you won’t run out of money.
Your personal outlook on your future health also plays into financial planning. Consider your own individual health factors and how you envision your retirement years. Some people want to make the most of the earlier years (while they believe they’ll still be healthy enough to enjoy it); that outlook will have an impact on their finances and their spending. Others are so scared of running out of money that they plan on spending as little as possible.
Think through these aspects in relation to your own life. You might be able to come up with a ballpark age, but you’ll also gain an understanding as to why long-range planning is so complex. If you underestimate how long you’ll live, you risk running out of money. If you overestimate too much, you may spend too cautiously and never enjoy the retirement you worked for.
The Medicare Connection
Most people qualify for Medicare, the federal health insurance program, at age 65. At this time Medicare becomes your primary health insurance, and you may also choose to get supplemental insurance to help fill in the gaps. There is a cost to Medicare, though few people think to make a plan around how they’ll cover this cost.
The important thing to realize about Medicare is this: The higher the income on your tax return, the more you’ll pay for your Medicare Part B premiums. (Part B covers outpatient medical services and doctor visits).
To ensure your premiums don’t keep going up year after year, it’s crucial to withdraw money strategically so as not to tip the scale and trigger a higher cost. That’s why Medicare planning has suddenly become a hot topic—how income shows up on your tax return is now more important than ever if you want to avoid paying more for Medicare Part B.
Medicare Planning & Retirement Distributions
Once you reach age 65, it’s important to understand how your income (including retirement distributions) affects the price you’ll pay for Part B coverage. How will your taxable income in retirement be impacted by the various types of accounts you might pull money from?
- Cash (from a savings account, for example) is not considered taxable income and will not appear on your tax return.
- Interest earned on that cash is taxable and will appear on your tax return.
- Traditional IRA withdrawals are taxable and will appear on your tax return.
- Roth IRA withdrawals are not taxed and will not appear on your tax return.
- Income sources will appear on your tax return but they may appear differently:
- A pension appears as ordinary income.
- Social Security is (in most cases) partially taxed based on your other income sources.
- Investment income is taxed in different ways:
- Interest is taxed at the ordinary income tax rate.
- Capital gains tax ranges from zero to 20%, and it may have something called net investment income tax on top of that, depending on your income.
- Dividends are taxed as either ordinary or qualified.
It’s all about accessing your money in a tax-efficient way. Money taken from a regular savings account may not increase taxable income, while withdrawals from a traditional IRA usually do. The result is that two retirees with the same spending needs can end up with very different Medicare costs depending on where their cash comes from.
Note that some strategies are riskier than others. For example, you may have stocks that have increased significantly in value—maybe you bought Nvidia at $10,000 and it’s now worth two million dollars. There are ways you can access that money without creating taxes on it, such as a pledged asset line where you borrow against that stock. While that can reduce taxable events (you avoid liquidating the stock and paying capital gains tax on it), this strategy comes with costs and should be reviewed carefully.
Another potential strategy involves life insurance. Money inside a permanent life insurance policy or an annuity grows tax-deferred until you withdraw it. Some people use the ability to borrow against these policies as a way to create tax‑free cash flow, since technically it’s treated as a loan rather than a withdrawal; you don’t pay taxes on it unless you don’t pay it back. Again, this approach isn’t right for everyone. Be selective when evaluating any insurance product—on paper they can sound flawless, but the reality doesn’t always live up to the brochure.
Navigating Medicare and Your Money
The goal isn’t to game the system or chase loopholes. It’s to build a retirement strategy that covers your healthcare costs, keeps your tax bill and Medicare premiums in check, and still gives you permission to enjoy the money you spent decades earning.
You can’t control how long you’ll live or exactly how healthy you’ll be in your 80s or 90s. What you can control is how prepared you are. If you’re looking for a financial advisor who can help you navigate the Medicare years successfully—and help you reach your other financial goals in your later years—get in touch with us at Curio Wealth!
