How Social Security and Medicare work together to maintain your financial health

Health care costs in retirement now average over $315,000 for a married couple.* So says the investment firm Fidelity.

But such numbers are just estimates. Your actual health care costs can vary greatly. But there are steps you can take now to care for all aspects of your health as you age. Even your financial health.

An important first step is to learn about some of the programs, like Social Security and Medicare, that can help pay for your health care services. Social Security can provide a monthly cash benefit to help maintain your financial health. Medicare plans provide health coverage that can reduce the out-of-pocket costs associated with your health-related expenses. Though they are different programs, they can work together to support your financial health.

Knowing the rules that govern your personal retirement savings plan is also a smart move. Medicare does not cover all health care expenses completely and most people will need to supplement their Social Security income with savings.

Learning a bit more about the resources available to help you maintain your health, financial and otherwise, can have an effect on how — and how much — you pay. 

1. Using your Social Security benefits

The major source of funds in retirement for many of us is Social Security. The federal government runs the program. It pays monthly cash benefits to millions of eligible people. 

How do you know if you are eligible for Social Security? 

If you or your spouse worked at a job that paid into the Social Security trust fund for 10 years or more, you are generally able to receive monthly benefits. But the rules can be complex. So if you’re not sure if you’re eligible for Social Security, check with the Social Security Administration.

The amount of your monthly benefit is based on a number of factors. Your benefit is the average of your 35 highest-income years. So the longer you work and the more you earn will mean a bigger Social Security check. 

But delaying when you start taking your benefits can also increase the size of your check. 

You can start getting a monthly benefit as early as age 62. But if you wait, you’ll usually get a bigger payment each month. For example, if you can wait to take benefits until your full retirement age, you can boost your monthly check by 30 percent. Waiting until you reach 70 years old increases your check by another 32 percent.

Full retirement age is 67 years old for those born after 1960. It’s slightly earlier for others.

2. Using retirement funds from your savings plan 

Social Security is not meant to pay for all your expenses. Most people will need to use personal savings, too. A popular way to save for retirement and getting some tax advantages involves putting money in retirement accounts. These accounts are often available through your employer. For instance, a 401(k) or a 403(b), an individual retirement account (IRA) or a health savings account (HSA). 

Saving money with accounts lowers your tax bill in the year you contribute. That’s because you put money in pretax. But be warned: In most cases, if you withdraw money before you turn 59 and a half, you’ll pay a hefty tax penalty. 

An HSA comes with even more tax savings. Contributing to an HSA reduces your taxable income, similar to a 401(k), 403(b) and IRA. But you don’t pay taxes on the money when you withdraw if it’s for qualifying health care expenses.

Of course, the HSA still has some drawbacks. It’s not strictly a retirement savings account. So you can’t contribute unless you have a high-deductible health plan. You also have to spend any money you take from your HSA on health care. Use it for other things and you’ll pay taxes on it.

3. Using your Medicare benefits

Most of us will rely on Medicare to pay for much of our health care as we age. Like Social Security, when you start receiving Medicare benefits depends on your age. Most people start when they turn 65. If you choose to take your monthly Social Security benefit before you turn 65, you’ll automatically be enrolled in Medicare Part A and Part B, the parts of Medicare that help cover hospital costs and doctor’s visits, starting the first day of the month of your 65th birthday. If your birthday is on the first day of the month, your Medicare coverage will start the first day of the prior month. 

That means when you choose to take your Social Security benefits will impact whether you are automatically enrolled in Medicare, but it won’t impact how much you pay for Medicare.

In fact, if you aren’t automatically enrolled and you wait to apply for Medicare, you could end up paying more for your Medicare coverage. If you wait more than three months past the age of 65 to apply and you don’t have another type of health plan, you may end up paying a penalty when you do sign up. Remember, even if you enroll in Medicare at 65, you will still generally pay a monthly premium for coverage.

You will also need to choose the type of Medicare plan you want. If you choose an Original Medicare plan, you will be covered for things like hospital stays and doctor visits. But:

• You will still need to pay for a percentage of the cost of your care
• You won’t have coverage for things like eyeglasses, hearing aids or routine dental services
• If you want coverage for prescription medicine, you’ll also need to sign up for that separately from Original Medicare

If you choose a Medicare Advantage plan, you receive all Original Medicare benefits and often get coverage for your eyes, ears and teeth. Many Medicare Advantage plans also include prescription drug coverage. 

It’s important to remember that with a Medicare Advantage HMO you will have a network of physicians and other health care providers you must choose from. 

With a Medicare Advantage PPO, you also have a network. But you’ll have the option to use Medicare providers outside of the network. If you use Medicare providers outside of your plan’s network, you may have to pay more for your care.

If you choose a Medicare Advantage plan, you will also have the financial peace of mind from the out-of-pocket maximum. You’ll never pay more than a certain amount out of pocket each year for covered services when you use the plan network. 

With Original Medicare, there is no out-of-pocket maximum. You pay a percentage of the cost of your care. That means you could still be responsible for a big medical bill if you have an expensive treatment.

What’s next in using my retirement, Social Security and Medicare benefits?

So should you wait until age 70 to claim Social Security benefits? Should you maximize your contribution to your retirement account? Should you sign up for Original Medicare or Medicare Advantage?

The short answer is: It depends. If you need your Social Security benefits at 62, then you should claim them. If you can’t put the max into your IRA on your current income, then contribute what you can. And if you’re not sure what Medicare coverage you need, then do some research to see what works best for you.

The important thing is to know your needs. Then explore your options. And, finally, make educated decisions on how to best take care of all aspects of your health. Using all three legs of the stool can improve the whole you — including your financial, emotional and physical health.

Five birthdays (and one half birthday) that can have a major impact on your financial health as you age