Fifty shades of gray: The confusing world of Social Security and Medicare

I am watching my hair turn 50 shades of gray as I struggle to map out a strategy to maximize my retirement benefits. It would be easier unraveling the human genome than trying to figure out the best strategy for taking my Social Security and Medicare benefits.

According to Forbes, the Social Security Handbook has over 2,728 separate rules as well as thousands of additional benefit explanations. Trying to figure out how to enroll, not to mention when to enroll, can be daunting. It’s the same situation with Medicare—the terminology is confusing, and the alphabet soup of options seems infinite. What’s more, even some of the so-called experts in the field contradict each other.

I can’t help but wonder how thousands of seniors like my mother, with their sometimes-limited educations, were able to figure out the intricacies of these benefits. At this point, I think I might be better off wearing a blindfold, spinning around and pointing to a random entry in a retirement handbook.

But this is serious. It’s the difference between spending the rest of my life in my daughter’s basement and lying on an exotic beach drinking piña coladas. So I’m doing my research. I’ve ordered books like AARP’s Social Security for Dummies, the New York Times bestseller Get What’s Yours: The Secrets to Maxing Out Your Social Security, and Kiplinger’s Retirement Planning 2015. According to the authors of Get What’s Yours, what you don’t know can seriously hurt you; wrong decisions about Social Security benefits cost some individual retirees tens of thousands in lost income every year. I want every dime I’m entitled to.

Mapping out a strategy. Kiplinger’s Retirement Planning tells readers that the first step is to decide how long you will live. As crazy as it sounds, you can find longevity calculators online. The websites Living to 100 and Blue Zones have them. (At BlueZones.com, click on “Vitality Compass” under the “Live Longer” menu at the bottom of the homepage.) The calculators give you a general estimate of how long you can expect to live. It appears that if you have a family history of longevity—especially on your mother’s side—you might consider delaying your Social Security benefits until full retirement age. (Your full retirement age will vary depending on the year you were born.) Since my mother just turned 93, I’ve decided to delay my retirement.

Another variable to consider before claiming benefits is marital status. Both AARP and Kiplinger point to an arsenal of strategies married couples can use to boost their payout. But since I am happily divorced—downright giddy, in fact—I skip most of the couples stuff and begin searching for strategies for a retiring bachelorette. Lo and behold, an appealing strategy discussed in the couples section is also listed as a strategy for singles.

Using the “File and Postpone” (also called “Claim and Suspend”) strategy, singles can apply for benefits when eligible (age 66 for those born between 1943 and 1954) and ask Social Security to suspend the benefits. Why? Social Security will not pay more than six months’ worth of benefits retroactively (and it won’t pay any retroactive benefits for the months before you’ve reached your full retirement age). If I file and suspend at age 66, I’ll be eligible to collect the benefits that accumulate after I filed.

The Kiplinger book gives an example that sold me on this strategy. A 66-year-old retiree was eligible to receive benefits of $2,500 per month. She decided to delay retirement until age 70, but at 66 she filed and suspended her benefits. Then, at age 68½ she became ill. Because she filed and suspended her benefits, she is eligible to receive 30 months of retroactive benefits totaling $75,000 for unexpected expenses or long-term care. Now, that’s a golden handshake!

Free sites offered by AARP, Financial Engines and T. Rowe Price could help you determine the best time to claim benefits. I used these free sites and all recommended that I take benefits at age 70 but use the “Claim and Suspend” strategy at age 66.

However, there is another variable that impacts my decision and it’s not discussed in any of the resources I found. Like millions of Americans, I am raising a grandchild and paying for her medical and dental care while she’s in college. I need to find out if employing this strategy would impact my ability to pay for her health care coverage through my employer. According to a March 2015 article published in USA Today, filing makes one eligible for Medicare Part A because enrollment is automatic for anyone older than 65 who applies for Social Security benefits. Consumers can’t opt out of Medicare Part A even if they want to. Automatic enrollment in Medicare Part A isn't necessarily a problem—at worse, it's duplicated coverage, but it doesn't have separate premiums or costs like Medicare Part B. However, it renders one ineligible to contribute to a health savings account. For individuals with a high-deductible health plan, “Claim and Suspend” makes them ineligible to contribute to the plan.

Medicare: Lost in translation. Most workers pay 1.45 percent of their earnings into the Medicare trust fund, and companies pay a matching 1.45 percent per employee. In 2013, the Affordable Care Act enacted an additional 9 percent Medicare tax on earnings of more than $200,000 for individuals and $250,000 for couples.

Having the right strategy for Medicare is as important as finding the right strategy for Social Security benefits, because taking a wrong step can cost you money. After signing up on a website to receive information about Medicare, my mailbox is running over with advertisements from HMOs, each promising that they can make it simple to apply. HMOs offer “Medicare Advantage” managed care plans that differ from “original Medicare.” However, each Medicare Advantage plan can charge different out-of-pocket costs and have different rules for how you get services (like whether you need a referral to see a specialist or if you have to go to only doctors, facilities or suppliers that belong to the plan for non-emergency or non-urgent care). These rules can change each year.

A few of the Medicare Advantage HMOs that sent me mail also offered in-person classes, while others held webinars. But as I combed through the mounds of material, all I found were gigantic contradictions and a dizzying array of choices. So I decided to sit in on a three-hour class offered by my current health care provider, Kaiser Permanente. As soon as the commissioned facilitator leaned that I was not retired, and that retirement was not in my near future, she began taking questions from the more immediately qualified participants. As I was leaving the seminar, she did tell me that my first step towards applying for Medicare should be to ask my employer two questions: (1) When I turn 65, does company policy dictate that I take Medicare benefits? and (2) Is there any provision in the company’s plan that requires me to assign my Medicare benefits to the company? If the answer to either or both is yes, then my employer’s policy dictates when I should apply for Medicare.

You can sign up for Medicare beginning three months before you turn 65, and coverage can start as soon as the first day of your birth month. The initial enrollment period extends three months after your 65th birthday. If you miss signing up in these few months before and after your 65th birthday, you still can enroll during Medicare’s open enrollment period (Jan. 1 to March 31) each year, but your premiums will be higher. In this case, your coverage would begin on July 1 of that year.

But as complicated as it seems, AARP says that there’s one simple choice: Choose the original Medicare plan, run by the federal government and consisting of Medicare Part A and Part B, or choose a Medicare Advantage plan (Part C), offered by private insurers and regulated by Medicare.

When you apply for Medicare, you are automatically enrolled in the Part A plan. Part A is your hospital insurance plan. It covers nursing care and hospital stays, but not doctors’ fees. You will not pay a monthly premium for Medicare Part A, thanks in part to the payroll taxes you paid while employed. However, you will be required to pay a yearly deductible before Medicare will cover any hospitalization costs. For 2015, the Part A deductible is about $1,260.

Medicare Part B pays for a large portion of your doctor visits, some home health care, medical equipment, outpatient procedures, rehabilitation therapy, ambulance services, blood work, lab tests, X-rays and mental health services. Part B is optional, and you might want to opt out of Part B if you stillhave health insurance through an employer, union or your spouse. However, monthly Part B premiums increase by 10 percent for each 12-month period you were eligible for Medicare but didn't sign up.

If you or your spouse is employed and covered by a group health plan at work, you must sign up within eight months of leaving the job or losing coverage to avoid the higher premiums. It’s important to plan in advance to sign up during that time, because if you choose to sign up later, it will cost you more.

According to Medicare.gov, consumers pay a premium each month for Medicare Part B. Most people will pay the standard premium amount. However, if your modified adjusted gross income as reported on your federal tax return from two years ago is more than a certain amount, you may pay an Income Related Monthly Adjustment Amount (IRMAA)—an extra charge added to your premium.

The out-of-pocket costs for original Medicare Part B can be surprisingly hefty. That’s why most people with original Medicare decide to buy a Medigap or other supplemental policy. Shop carefully, because the cost of these additional policies can run you several hundred dollars extra per month, but can save you thousands in the long run.

Finally, if you’re eyeing retirement in an exotic clime (I sure am!), Medicare generally won’t cover your health care costs while you’re traveling abroad. While you can keep your Medicare in force by paying the premiums, you’ll probably have to shoulder the costs for health care outside the U.S.