Do I need Medicare Part B? No Waiting!
It is a question that I get all the time. I’m healthy and living offshore – why should I bother with Medicare Part B? The answer is – it depends on if you ever plan to come back to the US to live. The reality is that paying for Medicare Part B is expensive for folks on a fixed income – a 15% increase to $170.10 per month this year. And if you plan to stay offshore for the rest of your life, then Paying for Part B probably does not make any sense at all.
But if you plan to come home when you hit the slow-go or no-go years – say sometime after 75 or 80 – then it makes sense to examine the financially impact with and without participating the entire time from age 65.
First, Medicare really wants people in Part B beginning at 65, and has a significant penalty:
“If you didn’t get Part B when you’re first eligible, your monthly premium may go up 10% for each 12-month period you could’ve had Part B, but didn’t sign up. In most cases, you’ll have to pay this penalty each time you pay your premiums, for as long as you have Part B.”
This penalty can really add up if you don’t participate for the first 10 years and then come home. I have spoken to many people who regret not participating in the early years of retirement, because the financial impact was so large later on.
Part B Cost-Benefit Analysis
I pulled the data for Part B annual increases for the last 48 years and examined the average annual price increase in Part B over that period. It is hard to imagine, but the monthly premium was $6.70 per month back in 1977, and has averaged 7.5% increase over that period – including a whopping 15% increase this year. The 21 year and 12 year average price increases are 5.7% and 4% respectively. I conservatively used estimated increases of 7% and 4% in my analysis for future projections.
Our analysis is simple; what is the cost difference if inflation continues at either 4% or 7% for two different cases. In the Base Case, payment is made every year for the first 20 years of Medicare Participation. In the alternative Case 2, no payment is made for the first 10 years, the penalty for not paying is accrued, and the payment begins in year 11 at age 76.
The financial model tells a powerful story about why Part B participation makes sense if you think that you will want it in the future. As shown in the following Exhibit 1, The total payments in the Base Case for the first ten years (with 7% and 4% inflation respectively) are $28,202.97 and $24,507.35 (shown in blue). Payments in the alternative Case 2 are zero – so far deferral seems to make sense.
But in both Cases, payment is made from age 76 to 85, and the Case 2 must make the penalty payments – which amount to double monthly payments after ten years (totals shown in green). As a result, the deferral Case pays a net penalty (shown in red) over the 20-year period of $25,479 or $10,685.76 (at 7% and 4% inflation respectively).
The message here is simple – if you think that you may need the Part B coverage in the future, do not skip the payments today. The penalties can be awful, and they come later in retirement – when you have been spending down you assets and are most vulnerable financially.