__Did you know that according to the National Center for Health Statistics, the average 65-year-old man today can expect to live roughly 18 more years, while his similarly aged wife can expect to live more than 20 more years? Another fact: Social Security payments generally replace less than 40% of a retiree’s pre-retirement income.__

What do these statistics tell you about the need to save for retirement? Everything. They underscore the importance of taking responsibility to prepare for your own retirement. This is especially true for small-business owners (and the self-employed) who don’t have a company contributing to a plan on their behalf. But small-business owners should be encouraged: they have access to the same types of plans large corporations use.

Let’s review the benefits of saving in a retirement account. One of the biggest is that funds contributed to a retirement plan usually aren’t taxed as current income. Further, contributions made by a business owner (but not employee deferrals) are tax-deductible as a business expense. And, unlike salaries, they’re not subject to payroll taxes.

Additionally, funds inside a retirement account grow tax-deferred. This means no income tax is due on contributions or the investment profits they generate until the money is withdrawn during retirement — unless one is using a Roth account. (With a Roth 401(k), contributions are taxed before going into the plan, but withdrawals of principal and earnings are tax-free in retirement.)

Offering a good retirement plan also helps attract and retain employees!

Many types of retirement plans exist, so business owners often have difficulty identifying which are best suited to their business. Let’s take a look at the plans available for use by for-profit organizations.

__1. Qualified Plans.__

There are two main categories of qualified plans:

*Defined benefit* specifies a monthly amount a retiree will receive, i.e., a pension. For example, the plan might guarantee a retiring worker 70% of his or her pre-retirement income for life.

*Defined contribution* specifies the contribution to be made by the employer/owner. It does not, however, guarantee a specific level of benefit at retirement. For example, the plan might specify a contribution amount equal to 3% of annual salary. The most popular types of defined contribution plans are the 401(k), SIMPLE 401(k), Profit-Sharing, and Employee Stock Ownership Plans (ESOP, not shown in table). Qualified plans must comply with extensive government rules regarding employee participation and coverage, and IRS reporting requirements can make such plans costly to set-up and maintain.

__2. IRA-Funded Plans.__

These plans use *individual retirement accounts* to hold the assets in an employee’s name. But unlike traditional and Roth IRAs, an employer funds at least part of the account. The two main types of employer-sponsored IRAs are Simplified Employee Pensions (SEP-IRAs) and Savings Incentive Match Plans for Employees (SIMPLE-IRAs). Employer-sponsored IRAs typically require less time and attention to establish and maintain than qualified plans.


However, these plans have a key disadvantage from the employer’s perspective: *amounts are fully vested as soon as they are contributed*. As the vesting row of the table below shows, IRA-funded plans don’t allow an employer to require a certain length of service before owning the funds in his/her account. If an employee quits the day after a contribution is made, the funds will still belong to him.


![](https://soundmindinvesting.com/assets/articles/l4-small-business-retirement-plans.png)


__Qualified or IRA-funded?__

There are tradeoffs when deciding which type of plan is best for your business. Contributing higher levels of money may mean annual reporting to the IRS is required (see table). Conversely, being free from the reporting requirements (IRA-funded plans) may mean contributions to employee accounts can’t follow a vesting schedule. The goal is to find a balance between flexibility and utility.Answering the following questions should narrow your choices:

- __Are you willing to make mandatory contributions annually?__ 
If yes, then consider all plans. The determining factors will be which group of employees you are targeting, whether you would like employees to be able to contribute, and whether you prefer gradual or immediate vesting of contributions. (If you’d rather not have to fund the plan every year, consider only SEP-IRA, Profit Sharing, and 401(k) plans.)
- __How much are you — as the employer — prepared to contribute annually?__
If you’re willing to commit greater than 3% of payroll, but less than $70,000 for each key employee, consider Profit-Sharing, 401(k), SEP, or SIMPLE-IRA plans. If you want to contribute $70,000 or more for key employees, consider Money Purchase, Defined Benefit, or possibly Profit-Sharing plans with some additional features.
- __Are you willing to make annual filings with the IRS?__
If so, then any type of plan is fair game. If not, stick with either a SEP or SIMPLE-IRA plan.

Answering these questions may not point you to a single “best” plan, but doing so should narrow the options. However, *unless you are comfortable working with detailed rules and regulations, seeking the help of a professional in making a final selection and implementing a plan is strongly advised.*

__That said, don’t allow the confusing nature of these plans to keep you from saving for retirement, or from helping any employees you have to do likewise. As the Book of Proverbs tells us, “Ants are creatures of little strength, yet they store up their food in the summer” — and they are called “extremely wise” for doing so ([Proverbs 30:24](https://ref.ly/Prov%2030.24;niv?t=biblia)). May it be so with us.__

__[Image](https://soundmindinvesting.com/articles/a-road-map-to-retirement-plans-for-small-business-owners1)__ used with permission

Since 1990, do-it-yourself Christian investors have relied on SMI for proven strategies and trustworthy guidance.

Sound Mind Investing

Retirement

Business owners often have difficulty identifying which are best suited to their business. Let’s take a look.

A Road Map to Retirement Plans for Small-Business Owners

__Here's what happened to an 88-year-old relative a few weeks ago. She answered her phone, even though she didn't recognize the number. (Mistake #1.) The caller said he worked with Medicare and had been reviewing her account. He had good news! He said she could get expanded benefits by answering a few questions and giving her consent. She did just that. (Mistake #2.)__

As it turned out, the caller was not a Medicare employee — as my relative had assumed — but an unscrupulous insurance agent selling Medicare-related policies. The line about "improving her benefits" wasn't false, per se, but the information was selectively presented. My relative never realized she was consenting to significant changes in her coverage.

Here's what happened. The agent moved her out of traditional Medicare (which she'd had for 23 years) and into Medicare Advantage, effectively terminating her full-featured "Medigap F" plan and her stand-alone Part D prescription coverage.

As SMI noted in a recent article, Medicare Advantage is a [good choice for many seniors](https://soundmindinvesting.com/articles/bridging-the-gap-covering-what-medicare-doesnt-pay). Such plans typically offer broader benefits than traditional Medicare with Medigap. However, an Advantage plan — particularly an HMO plan, which the agent enrolled her in — is wholly inappropriate for an 88-year-old with existing health conditions. (HMO plans often require referrals to specialists, including the type of specialists my relative has been seeing for years.)

### "Marketing misrepresentation"

What happened to my relative has a name: "marketing misrepresentation." The practice violates Medicare's rules, yet marketing violations occur with some frequency, according to a 2022 [report](https://www.finance.senate.gov/imo/media/doc/Deceptive%20Marketing%20Practices%20Flourish%20in%20Medicare%20Advantage.pdf) (PDF) issued by the Senate Finance Committee. (The Finance Committee has jurisdiction over "health programs financed by a specific tax," which Medicare is.)

"Of particular concern to the Committee were reports...of agents changing vulnerable seniors'...health plans without their [genuine informed] consent," the report stated.

Although Medicare is a federal program, private brokers and agents are empowered to help seniors navigate the complex and confusing Medicare landscape and assist with enrollment. Such brokers and agents [earn money from Medicare](https://ritterim.com/blog/how-much-can-insurance-agents-make-selling-medicare/#med-supp) for each person enrolled.

Because that creates a financial incentive that could work against a senior's best interest, brokers and agents "are subject to rigorous oversight by their contracted health or drug plans," [according](https://www.cms.gov/medicare/health-drug-plans/managed-care-marketing/medicare-marketing-guidelines/agent-broker-compensation) to the federal Centers for Medicare and Medicare Services. Those who don't comply with the marketing and enrollment guidelines face "termination with their contracted health or drug plans."

Even so, some brokers and agents skirt the rules, and it may be weeks before a senior realizes what has happened. By then, previous coverage has been terminated and replaced with a plan that may have more out-of-pocket costs and not cover the same doctors or facilities.

### Undoing the damage

Unwinding changes resulting from marketing misrepresentation can require hours on the phone, trying to disenroll from a new plan and re-establish previous coverage. (In some cases, reversing the changes may not be possible.)

Fortunately for my relative, the unwanted changeover was discovered quickly, and thanks to the helpful efforts of one of the insurance companies involved, her previous Medicare arrangement is back in place now.

However, she had to postpone at least one medical appointment because of uncertain coverage, and she may be required to pay out of pocket for two early June physical therapy visits that normally would have been covered. That's bothersome, but the financial damage and inconvenience could have been much worse.

### Protect yourself and learn more

The Centers for Medicare and Medicaid Services stresses that *Medicare employees do not make unsolicited calls to seniors about their benefits*.

Brokers and agents are not supposed to make unsolicited calls, either. They're also prohibited from leaving leaflets or flyers at a residence unless the senior has set up an appointment.

The Senior Medicare Patrol National Resource Center (funded by U.S. taxpayers) has more information about common [Medicare Marketing Violations and Misleading Marketing](https://smpresource.org/medicare-fraud/fraud-schemes/medicare-marketing-violations-and-misleading-marketing/).

__If you think you've been a victim of misrepresentation and other Medicare-related fraud, [report it](https://smpresource.org/you-can-help/report-fraud/) to the Senior Medicare Patrol in your state.__

__[Image](https://soundmindinvesting.com/articles/medicare-marketing-misrepresentation-another-scam-targeting-seniors)__ used by permission.

Medicare allows private brokers to market Medicare-related plans. But when brokers skirt the rules, seniors get hurt.

Medicare "Marketing Misrepresentation": Another Scam Targeting Seniors

__We often learn more from our mistakes than from our successes. But making mistakes with money can be costly — literally. So it’s far better, if possible, to learn from *other people’s* mistakes.__

Two years ago, investment firm Natixis surveyed 2,700 financial professionals worldwide about the most prevalent mistakes they’ve observed regarding retirement planning — errors and oversights people commonly make about later-life financial preparation. We’ve detailed several of those common errors below.

- __Underestimating the impact of inflation.__

The survey of financial professionals tagged this as the single most common retirement-planning mistake. Just as most people don’t fully appreciate the power of compounding in the long-term growth of an investment portfolio, they also fail to grasp the destructive impact of *inflation’s* compounding.

Although inflation is generally discussed in terms of “higher prices,” price increases result from what is truly happening: the devaluation of money makes it lose “purchasing power.” That’s why what used to cost, say, $75, now costs $100. It’s because the money is worth less than it used to be.

Even with a relatively tame rate of inflation, the compound effect over many years [destroys considerable purchasing power](https://soundmindinvesting.com/articles/the-large-impact-of-even-low-inflation-over-time). Consider the situation 20 years from now if inflation grows at just 3% a year: Today’s $75,000-a-year lifestyle [would cost](https://www.calculator.net/inflation-calculator.html) $135,000. That’s $60,000 additional dollars to achieve or maintain roughly the same standard of living provided by $75,000 today.

- __Investing too conservatively.__

This error ties directly to the inflation-related point above. To meet the challenge posed by inflation, one must invest in instruments that have the potential to match or outpace inflation. Although fixed-income instruments such as CDs, bonds, and savings accounts serve essential functions within one’s overall financial holdings, they are ill-suited for beating inflation. That’s why investing too conservatively can be quite risky.

- __Overestimating investment income.__

A realistic retirement plan should consider your potential longevity (see next point) and use return projections that aren’t overly optimistic. Withdrawing too much money too soon from your retirement account(s) will create problems later, especially if you or your spouse live to a ripe old age.

A general rule is that withdrawing no more than 4% annually from your portfolio will ensure the account isn’t depleted early. However, the “4% rule” [isn’t always optimal](https://soundmindinvesting.com/articles/how-much-should-you-withdraw-each-year-during-retirement). Your personal “safe withdrawal rate” depends on several factors, including other sources of income, the size of your portfolio, and the [sequence in which your investment returns occur](https://soundmindinvesting.com/articles/this-is-not-a-test-retiring-in-or-near-a-bear-market).

- __Underestimating your life span.__

As SMI noted in a [recent article](https://soundmindinvesting.com/articles/claiming-social-security-benefits-timing-can-make-a-big-difference), even though the average life expectancy in the U.S. is 76 years, a man who reaches age 65 in good health has a greater than 60% probability of living to age 85. A 65-year-old woman in good health is more likely than not to live into her 90s.

Therefore, for many people, making wise financial preparations for their retirement years must take into account two decades or more of life after age 65. Again, it is impossible to know how those years will play out concerning investment performance and inflation. However, failing to plan for 20 or more years of retirement and not considering the [range of possibilities](https://soundmindinvesting.com/articles/the-monte-carlo-method-a-primer) is asking for trouble.

- __Forgetting healthcare costs.__

In the U.S., Medicare covers many — but not all — health expenses for people 65 and older. Generally speaking, Medicare covers routine medical costs (including some [preventive care](https://soundmindinvesting.com/articles/an-ounce-of-prevention-free-preventive-services-from-medicare)) and short-term hospital stays. Covering other expenses with insurance requires purchasing a [supplement plan (Medigap) or a Medicare Advantage plan](https://soundmindinvesting.com/articles/bridging-the-gap-covering-what-medicare-doesnt-pay), and you’ll likely face out-of-pocket expenses for co-pays and other things such plans don’t cover. Many plans, for example, [don’t include dental coverage](https://soundmindinvesting.com/articles/be-prepared-for-post-retirement-financial-shocks).

Of course, the biggest health-related wild card in retirement planning is the potential cost of extended care. Insurance policies that cover long-term care have grown prohibitively expensive for most people, but a more affordable [short-term-care policy](https://soundmindinvesting.com/articles/short-term-care-insurance-an-alternative-for-extended-care) may be an option. For those who qualify for a Health Savings Account, [building up an HSA](https://soundmindinvesting.com/articles/a-health-savings-account-the-other-retirement-account) during one’s working years can help fund later-life health costs.

Remember that one of the best ways to prepare for later-life health is to take good care of yourself today. Many common health issues result from poor diet, lack of exercise, too little sleep, too much stress, and other controllable factors.

__Take advantage of helpful resources__

Because so many variables change over the years, it is difficult to anticipate everything that might happen. Fortunately, resources are available to help you avoid common errors and oversights.

One is MoneyGuide, the award-winning web-based financial planning tool [available to SMI Premium-level members](https://soundmindinvesting.com/articles/personalized-financial-planning-is-within-your-reach). MoneyGuide can run hundreds of “what if” scenarios, taking into account variables such as market reversals and higher inflation rates.

Additionally, you may want to seek guidance from a financial professional, such as a Stewardship Advisor at [SMI Private Client](https://soundmindinvesting.com/smiprivateclient) (a separate business from the SMI newsletter, although the two businesses are affiliated).

__In an unpredictable world, no retirement plan will work out perfectly. But by thinking carefully and taking advantage of helpful resources, you can go a long way toward securing your financial future.__

__[Image](https://soundmindinvesting.com/articles/avoiding-the-most-common-retirement-planning-mistakes)__ used with permission

We often learn more from our mistakes than from our successes. But making mistakes with money can be costly — literally.

Avoiding the Most Common Retirement-Planning Mistakes

__Retirement confidence is ticking upward, but it has not fully recovered from the record low numbers recorded in last year’s long-running [Retirement Confidence Survey](https://www.ebri.org/retirement/retirement-confidence-survey), conducted for 34 years by the Employee Benefit Research Institute (EBRI). In this year’s just-released report, 68% of today’s workers and 74% of retirees said they feel very or somewhat confident that they will have enough money to live comfortably in retirement. That’s up from last year’s 64% and 73% respectively, but still below the levels reported in the 2022 survey.__

Just 21% of today’s workers and 28% of retirees report being very confident about their retirement finances.

The top retirement-related concerns among both groups center on inflation and the possibility that the government may make changes to the American retirement system.

__Lessons for today’s workers__

If you’re in the workforce, the EBRI survey contains several helpful roadsigns, pointing the way toward better retirement planning. Among them:

__• Let preparedness drive confidence.__ Every year, this survey shines a spotlight on a glaring gap between the confidence and assumptions made by current workers vs. their actual preparedness and the experience of today’s retirees.

For example, while 68% of today’s workers are somewhat or very confident about how well their finances will sustain them in retirement, 43% of workers age 55 or older have less than $100,000 saved for retirement.

And, while 58% of today’s workers age 55 or older plan to retire at age 66 or older (36% plan to retire at age 70 or never retire), just 19% of today’s retirees actually retired that late.

Another area of disconnect between today’s workers and retirees has to do with working for pay in retirement. Whereas 75% of today’s workers expect to do so, just 30% of retirees actually have.

The EBRI survey has consistently found that a large percentage of retirees leave the workforce earlier than planned. In the latest survey, that was true for 49 percent of today’s retirees. While 39% of those said they retired earlier than planned because they could afford to do so, most early retirees stepped out of the paid workforce because of a hardship, such as a health problem or disability, or because of changes at their company.

__• Run the numbers.__ One finding that seems to remain the same year after year is the percentage of current workers who have used a retirement planning calculator to estimate how much money they will need for retirement and what that means in terms of how much they should be investing now. Only half of today’s workers have taken that step. Those who have run the numbers tend to begin saving more.

(If you are an SMI Premium-level member, have you taken advantage of the opportunity to utilize [MoneyGuide](https://soundmindinvesting.com/articles/a-new-better-process-for-getting-started-with-moneyguidepro) for your retirement planning? For a one-time fee of just $50, this powerful planning software will give you the insights you need to be especially well-prepared.)

__• Understand Social Security.__ While most of today’s workers expect Social Security to be a source of income in retirement, fewer than half have reviewed the amount of their benefits at their planned retirement age, and less than 60% have thought about how the age at which they claim benefits will impact the amount they receive. You can gain this information from the [Social Security Administration’s website.  ](https://www.ssa.gov/prepare/get-benefits-estimate)

__• Ditch the debt.__ For some reason, this year’s survey apparently did not ask about debt. However, in last year’s survey, 62% of workers said debt is a problem for them, and that issue isn’t likely to have disappeared.

While the survey didn’t break debt down into specific types, other surveys have pointed to an increase in the number of people bringing a mortgage into their later years. As we have recommended before, it’s wise to plan to retire your mortgage by the time *you* retire. And if you plan to refinance, be careful not to reset the 30-year payoff clock to a date that’s past your intended retirement age.

__Learning from those who’ve gone before us__

One of the best sources of wisdom is the actual experience of those who have done what we plan to do. The EBRI study shows several important dimensions of life for today’s retirees, which provide a helpful roadmap for today’s workers.

*[Image](https://soundmindinvesting.com/img/asset/Y2xvdWQvZGlmZmVyZW50X2dlbl93b3JrZXJzLmpwZw==?fit=crop-98-94-1.1&w=1660&h=896&s=f8de3a4961692d6d4f5594938f6af13c) used with permission.*

Just 21% of today’s workers and 28% of retirees report being very confident about their retirement finances.

Helpful Lessons From Today’s Retirees

__There’s no doubt that automatic enrollment has boosted participation rates in 401(k) plan accounts. That’s a very good thing.__

However, there’s a downside to workplace retirement plan automation as well. It seems to be leaving some participants with money, but not the best money mindset.

### __Now or later?__

For example, a few years ago, the *Wall Street Journal* cited several examples where workers who never made a conscious choice to participate in their workplace plan eventually were shocked to discover that they had quite a bit of money built up in their accounts. Without appreciating the importance of leaving the money alone so it could grow and be available to them in their later years, they wanted the money *now.* And after finding out how easy it would be to “borrow” the money, they did!

More specifically, a study cited by the *Journal* found that “within eight years of joining a 401(k) plan...automatically enrolled workers withdraw nearly half of the extra they manage to save” — far more than workers who had to sign up for their retirement plan on their own.

According to Harvard economist Brigitte Madrian, “We have figured out how to get money into the retirement savings system. Now we need to think about how to keep that money in the system.”

### __Even small account balances matter__

In another example of not appreciating the value of letting 401(k) plan money grow for retirement, after leaving their company, more than 60% of 401(k) participants with balances below $10,000 liquidate their accounts, according to Retirement Clearinghouse LLC. Had they left the money in the account, transferred it to their new employer’s plan, or transferred it to an IRA, they would have avoided paying income taxes and a 10% penalty.

“When people hardly have any money in the system, it doesn’t seem worth it to them to roll it over,” said Lori Lucas, president of the Employee Benefit Research Institute.

### __What’s the money for?__

Last year, according to *[The Wall Street Journal](https://www.wsj.com/personal-finance/retirement/more-americans-are-treating-their-401-k-s-like-cash-machines-deaa3f8f?st=sigtfbe6ehux4j5&reflink=desktopwebshare_permalink)*, a record number of 401(k) plan participants took early withdrawals from their accounts for financial emergencies. While the overall number — 3.6% of participants — seems relatively small, that figure was up nearly 30% from the 2.8% of participants who made such withdrawals in 2022, and up 80% from the pre-pandemic level of 2%.

The IRS allows hardship-related withdrawals for reasons including preventing eviction or paying medical bills. Avoiding foreclosure was the reason behind 40% of hardship withdrawals in 2023.

Such withdrawals from a traditional 401(k) plan account come with an income tax bill and, if the person making the withdrawal is younger than 59 and a half, a 10% penalty.

### __Some solutions__

Since automation seems to be doing a good job of getting money *into* 401(k) plans, *keeping* money in the plans may be a matter of education, especially on two points.

First, it would be helpful if new plan participants more clearly understood the importance of letting their 401(k) plan money grow for their later years.

Second, it may be helpful to find out whether new hires have an emergency fund before automatically enrolling them in a 401(k) plan. It’s generally best to build an emergency fund that contains three to six months’ worth of essential expenses before allocating money to retirement savings.

If they have the means to allocate money to an emergency fund while also contributing enough to get some or all of any available matching money, that would be ideal. However, if they can’t do both, funding the emergency savings account first would seem to be the better path.

### __Automation plus__

Today, a growing number of employers are offering the option to have automatic payroll deductions used to build an emergency fund. That’s well and good, but automation alone can’t make people wise money managers. Automation plus education would be better.

*[Image](https://soundmindinvesting.com/img/asset/Y2xvdWQvYXJ0aWNsZXMvYnJlYWtpbmdfcGlnZ3lfYmFuay5qcGc=?fit=crop-1-97-1&w=1660&h=896&s=4d0738338b53e35a41e7c48cbee32651) used with permission.*

A downside to workplace retirement plan automation is that it seems to be leaving some without the best money mindset.

The 401(k) Emergency Fund

__Many Americans assume Medicare pays all medical expenses for people 65 or older. That isn’t so and never has been. Congress created Medicare 60 years ago to cover routine medical costs and short-term hospital stays, and Medicare’s main program has remained essentially unchanged since then.__

However, in the 1970s, as healthcare costs rose and treatments expanded, the gap between what Medicare paid toward medical bills and how much patients had to pay grew larger. Congress then authorized Medicare Supplemental Insurance (in 1980), which led to the creation of optional add-on plans — offered by private insurers — called “Medigap.” The state-regulated, federally standardized plans pick up where Medicare benefits leave off.

In 1997, Congress went further, creating another option for supplemental coverage. The result was what is now called Medicare Advantage. These private plans, subsidized by Medicare, combine the specific benefits of “Original Medicare” with a gamut of additional benefits designed by private insurers.

Having choices in health coverage is a good thing. But that doesn’t mean navigating the range of Medicare options is easy. Indeed, it can be challenging and confusing.

__This or that?__

When approaching age 65 — the age at which most people become eligible for Medicare — seniors must choose between Original Medicare (also known as Medicare Parts A and B) or a private Medicare Advantage plan (Part C), although delaying enrollment is possible under certain conditions.

Those who opt for Original Medicare face a second decision: whether to purchase optional Medicare Supplement Insurance (Medigap). A senior wanting a supplement plan must choose among at least eight Medigap offerings, each with a different benefit structure and cost. (A further choice: whether to purchase optional “Part D” prescription coverage.)

Of Medicare’s 67 million current enrollees, about 20% have Original Medicare without a supplement plan, while 30% have Original Medicare along with an add-on Medigap supplement. The remainder — slightly more than half of Medicare beneficiaries — have selected an Advantage plan.

To be clear, the only choice required at age 65 is between Original Medicare and Medicare Advantage. Selecting a Medigap plan to supplement Original Medicare is a separate decision that can be made later. However, seniors who select Original Medicare tend to choose a Medigap policy at about the same time.

__Supplementing with Medigap__

Medicare supplement policies cover costs — primarily deductibles, copays, and coinsurance — not paid for by either Part A (hospital insurance) or Part B (coverage for doctor visits and other medical services). Most Medigap plans cover all hospital charges and most of the non-hospital medical expenses that are excluded by Medicare. Certain coverage parameters vary depending on the type of supplement plan selected (see table below).

In most states, supplemental policies come in eight varieties, known as Plans A, B, D, G, K, L, M, N. (Don’t confuse Medigap “Plan A” or “Plan B” with Medicare’s Part A and Part B!) Medi*gap* Plans C and F are available only to seniors who turned 65 before Jan. 1, 2020.

Every Medigap “A” plan — regardless of insurance company or state — has the same *benefits*, each “B” plan likewise is the same, and on down the line. However, Medigap *premiums* — even for the same plan type — can vary widely from company to company, so shop around.

(Be aware that Massachusetts, Minnesota, and Wisconsin have different Medigap plans. Also, a few states offer Medicare SELECT, a reduced-cost supplement plan.)

Because most supplement plans pay “first-dollar” coverage (i.e., they cover all of the “gap” between what Medicare pays and the total obligation), premiums aren’t cheap — typically $150 to $450 a month, depending on one’s location, age, and particular policy. That premium is in addition to the Part B premium all Medicare beneficiaries must pay, which is currently $174.70/month for most beneficiaries (higher-income beneficiaries pay more).

During the sixth-month Open Enrollment Period surrounding when a person first enrolls in Medicare Part B, Medigap policies are “guaranteed issue.” In other words, a person with a health condition who applies during that period can’t be refused or made to pay higher rates. However, once the sixth-month window has passed, an insurance company can deny a Medigap application or set a higher premium based on a pre-existing condition.

If you decide to purchase a Medigap policy, choose carefully. Although switching to another supplement plan is possible later, switching is cumbersome (except in a handful of states that allow switching once a year). In addition, any new policy likely won’t be “guaranteed issue,” meaning an insurance company could deny an application or require a higher premium for a person with a health condition.

__Taking Advantage__

Companies that sell Medicare Advantage plans contract with Medicare and agree to cover everything Original Medicare covers. Instead of getting Plan A’s hospital coverage and Plan B’s medical insurance directly from Medicare, a senior with Advantage receives them from a private company.

However, Advantage plans go beyond the Medicare-designed A and B benefits. Many include coverage for Medicare deductibles and coinsurance costs (similar to what Medigap policies cover for enrollees in Original Medicare). Some plans include vision, hearing, dental coverage, and even health-club memberships. Many (but not all) incorporate a Medicare Part D prescription benefit too.

Compared to most Medigap plans, Medicare Advantage comes at a remarkably low monthly cost. According to the federal government’s Centers for Medicare & Medicaid Services, the average Advantage monthly premium in 2024 is less than $20. The average is so low because nearly three-fourths of seniors in Medicare Advantage pay no *plan* premium at all. In part, that’s because competition is keen. The typical Medicare beneficiary can choose from more than 40 Advantage plans.

(Even if an Advantage plan has no premium, Advantage enrollees, just like beneficiaries in Original Medicare, must still pay the government-mandated Part B premium.)

While Advantage plan premiums are attractive, policyholders do face restrictions not encountered by those who choose Original Medicare, such as being limited to a defined network of providers. Medicare Advantage plans can’t refuse an applicant based on a pre-existing condition, but some plans may limit access to certain specialists or treatments, so shop carefully.

Advantage beneficiaries also face potentially higher out-of-pocket expenses (i.e., expenses not reimbursed by insurance) than enrollees who select Original Medicare and Medigap. However, that liability isn’t open-ended. Federal law requires Advantage plans to limit annual out-of-pocket costs.

In 2024, the limit for in-network services is $8,300. However, according to the Kaiser Family Foundation, most plans set the limit much lower—at an average of about $5,000. The 2024 legal limit for combined in-network *and* out-of-network services is $12,450. Once the out-of-pocket limit is reached, the plan pays all covered expenses in full.

Some Medicare Advantage plans use an HMO (health maintenance organization) approach, while others use a PPO (preferred provider organization) structure (see Table A below). In addition, Special Needs Plans (SNP) exist for people with particular health problems.

![](https://soundmindinvesting.com/assets/articles/l4-table-a-compare-meidcare-options.png)

__Making the Original vs. Advantage decision__

There is no simple answer for deciding whether to select Original Medicare or Medicare Advantage nor is there an easy template for choosing a Medigap plan. Your choices will depend on your current (and anticipated) health needs, your budget for premiums and out-of-pocket expenses, and how comfortable (or uncomfortable) you are with exposure to the “gaps” in Medicare coverage.

From a premium standpoint, the cheapest approach to Original Medicare is to forgo any supplement policy. About 4-out-of-10 of people who enroll in Original Medicare choose this route. However, choosing Original Medicare without adding a Medigap policy carries significant financial risk. Without Medigap, a beneficiary with Original Medicare is responsible for paying the Part A deductible ($1,632 for each hospital stay) plus 20% coinsurance for Part B medical expenses. Medigap policies typically pay these costs in full (see Table B below).

Further, Medigap policies usually cover extended hospital stays (beyond the 60 days Medicare will pay). In some cases, supplement plans will pay for a limited number of days in a skilled nursing facility. (They do not pay for assisted living, Alzheimer’s care, custodial care, or adult daycare.)

For people unwilling or unable to pay a premium for a Medigap supplement, the best approach is to choose a low- or no-premium Medicare Advantage plan. This would reduce financial exposure at little or no additional monthly cost.

![](https://soundmindinvesting.com/assets/articles/l4-table-b-medigap-plans.png)

__Where to get more information__

Medicare’s website offers a [plan finder tool](https://www.medicare.gov/plan-compare) that lists the Medigap and Medicare Advantage plans by zip code, including price ranges for premiums and estimates of potential out-of-pocket outlays. In addition, the Centers for Medicare and Medicaid Services has a free 52-page guide online titled [“Choosing a Medigap Policy” ](https://www.medicare.gov/publications/02110-medigap-guide-health-insurance.pdf)(PDF).

*[Images](https://soundmindinvesting.com/img/asset/Y2xvdWQvbDQtYnJpZGdpbmctZ2FwLW1lZGljYXJlLW1lZGlnYXAuanBn?fit=crop-18-60-1.5&w=1660&h=896&s=2cb61b5e7f196566a32c69fff34ca509) used with permission.*

Many Americans assume Medicare pays all medical expenses for people 65 or older. That isn’t so and never has been.

Bridging the Gap: Covering What Medicare Doesn’t Pay

__We work, and then we don’t work. That *traditional* view of career and retirement planning is evolving into something more nuanced, with “phased retirement” and “working for pleasure in retirement” becoming more common ways that people envision their later years, especially today’s younger workers.__

According to Fidelity’s [2024 State of Retirement Planning study](https://preview.thenewsmarket.com/Previews/FINP/DocumentAssets/663841.pdf), the advice of agrowing number offinancial planners to have something compelling to *retire *to rather than *retiring from* your job seems to be taking hold. Apparently, the global pandemic was also a factor, with some 66% of adults saying the COVID crisis “made them more intentional about focusing on their personal passions and dreams in retirement.”

Rather than retirement being a full stop from work, they hope to ease into it, moving from full-time to part-time work before stopping completely. Millennials, those ages 27-42, are especially likely to say they look forward to “pursuing work for pleasure while in retirement.”

__The desire for a do-over__

One of the most common retirement-related regrets across all generations is not having started saving for retirement earlier. While that was evident in the Fidelity study, there are encouraging signs here as well, with the youngest respondents — the 26-or-younger members of Gen Z — indicating that they *did* start saving at an early age, *and* they’re aware that it would have been better had they started even earlier.

__Generation | Age started saving for retirement | Age they wish they had started__
__Gen Z__ | 20 | 18
__Millennials__ | 27 | 22
__Gen X__ | 36 | 26
__Boomers__ | 44 | 33

As I describe in *[Trusted: Preparing Your Kids for a Lifetime of God-Honoring Money Management](https://www.amazon.com/Trusted-Preparing-Lifetime-God-Honoring-Management/dp/1646070755)*, many of today’s children could have a huge head start on saving for retirement by the time they graduate from high school. For example, it’s not unrealistic for many of today’s young people to save $3,000 by age 18. If they put the money in a Roth IRA and invest it aggressively, even if they never add another penny to that account, it’s possible that they could have over $1 million available tax-free by the time they are 70.

__Now or later?__

Preparing for retirement is a balancing act, even for the most intentional planners. It’s common for people to want to travel more in retirement to spend time with their adult children/grandchildren or enjoy certain experiences they didn’t have the time or resources to enjoy during their careers. But it’s also common for many such planners to miss out on what they had hoped to enjoy because of ill health in retirement.

So, on the one hand, if you save too much now, you may be trading off activities you’ll never be able to experience. On the other hand, if you *spend* too much now in order to experience what you might not be able to experience later, you may be trading off being better financially prepared for your later years. Finding the right balance between those priorities can be a challenge.

__What resonates with you in all of this? Do you envision retirement as a full stop from work or something you’ll ease into? And how are you balancing the need to save enough for retirement while at the same time not missing out on certain memory-making experiences you might not be able to enjoy later?__

*[Image](https://soundmindinvesting.com/img/asset/Y2xvdWQvcmV0aXJlZV9zaG9wbF9vd25lci5qcGc=?fit=crop-2-67-1&w=1660&h=896&s=0fc864fea84fad17a4a5930565a9065c) used with permission.*

That traditional view of career and retirement planning is evolving into “phased retirement” and “working for pleasure".

Expectations About Retirement Are Changing

__Medicare Advantage, which offers Medicare-approved health plans sold by private insurers, has grown by leaps and bounds since being authorized by Congress as "Medicare Part C" in 1997. Today, more than half of Medicare beneficiaries choose Medicare Advantage (MA) over "traditional" Medicare, according to the [Kaiser Family Foundation](https://www.kff.org/medicare/issue-brief/medicare-advantage-in-2023-enrollment-update-and-key-trends/).__

But even though Medicare Advantage has been an overall success, one type of Medicare Advantage plan has struggled to attract plan sponsors and users. Now, it is almost gone: The Medicare Medical Savings Account (MSA).

__Offering Medicare beneficiaries more flexibility and choice__

The structure of the Medicare MSA is the same as the Health Savings Account (HSA) available to under-age-65 Americans enrolled in a high-deductible health plan. The main difference is that the entity making the annual contribution to the savings account is the U.S. government (via the health plan provider) rather than an employer.

Here is more from the federal government's [Centers for Medicare and Medicaid Services](https://www.cms.gov/Medicare/Health-Plans/MSA/Downloads/MSAFactSheet-3-13-08.pdf) (PDF).

*A Medicare Medical Savings Account...combines a high-deductible health plan with a medical savings account. Enrollees of Medicare MSA plans...use their savings account to help pay for health care, and then will have coverage through a high-deductible insurance plan once they reach their deductible....*

*The plan deposits money from Medicare into the savings account at the beginning of each year.... Medicare Part A and Part B expenses count towards the MSA plan deductible....*

*Any money left in an account at the end of the year will remain in the savings account. If enrollees stay with the plan the following year, the new deposit will be added to any leftover amount.*

Ideally, a user with a Medicare MSA plan would seek to keep expenses as low as possible by comparison shopping among providers, even those outside the user's local area. Since the funding for expenditures (up to a certain level) would come from the MSA rather than an insurance company, the user wouldn't be restricted to providers that were part of a health plan's HMO (health maintenance organization) or PPO (preferred provider organization).

In addition, MSA users who were healthy and had relatively low health expenses in a given year could roll over remaining MSA funds to the following year, thus building a tax-free, interest-bearing healthcare "nest egg" for future expenses. Further, once the money in the account exceeded a designated threshold (typically $2,000), the account holder could [invest](https://www.optum.com/content/dam/optum/consumer-activation/unknown/MSA_Investment_Overview.pdf) amounts above that threshold in mutual funds, potentially earning greater returns.

One significant drawback: Unlike other Medicare Advantage plans, Medicare MSA plans can't include prescription coverage, so users must purchase a separate drug plan (Medicare Part D) or pay for prescriptions out of pocket.

__'Poised for popularity'__

Unfortunately for consumers, most insurance companies offering other types of Medicare Advantage plans turned up their noses at Medicare MSAs. Only a handful of companies made them available, and in only a few states.

Then, five years ago, Pennsylvania-based Lasso Healthcare rolled out Medicare MSAs in 17 states. Later, it boosted the total to 35 states plus DC, as shown in red on the map below.


![](https://soundmindinvesting.com/assets/articles/usa-lasso-coverage-2022-v3.svg)

Source: Lasso Healthcare

At last, it appeared that the breakthrough for Medicare Medical Savings Accounts had arrived.

In 2019, PBS Newshour published a column about Medicare MSAs titled ["Why These Unique Medicare Advantage Plans Are Poised for Popularity."](https://www.pbs.org/newshour/economy/making-sense/column-why-these-unique-medicare-advantage-plans-are-poised-for-popularity) The piece noted that such plans "could cover most routine medical spending for healthy enrollees and thus act as a less expensive way to insure against catastrophic health risks."

However, the expected popularity never occurred, prompting Lasso to [pull the plug](https://lassohealthcare.com/) on Jan. 1, 2024. The company has discontinued all its Medicare MSA offerings nationwide. "These plans no longer align with our revamped mission and strategy," said a spokesman for Lasso's parent company, Zing Health.

Translation: Medicare MSAs haven't generated much profit for the company, and the situation is unlikely to change. The few other insurers that once offered Medicare MSAs seem to have reached the same conclusion. Companies shuttered MSAs in Vermont and New York in 2023. Now, according to [Q1Medicare](https://q1medicare.com/faq/FAQ.php?faq=what-is-medicare-medical-savings-account-msa-plan&faq_id=182#:~:text=In%202023%2C%20Medicare%20Medical%20Savings,not%20offer%20MSAs%20in%202023), only one company in the entire U.S. still provides Medicare MSA plans, and [only in Wisconsin](https://networkhealth.com/__assets/pdf/medicare/2024-sob/msa_sob_2024_4561-01-0523_f_508.pdf#search=Medical%20Savings%20Account) (PDF).

As shown below, Medicare MSAs — though "poised for popularity" five years ago — are today almost non-existent.

![](https://soundmindinvesting.com/assets/articles/231003_ma_type_total.jpg)

Source: Q1Group. (Note: PFFS are Private Fee-for-Service Plans.

Like MSAs, they have failed to gain traction in the Medicare Advantage marketplace.)

__Sorry, we're not interested__

In theory, Medicare Medical Savings Accounts should have been an attractive option for price-conscious seniors wanting more control over managing health expenses and choosing providers.

But Lasso Healthcare's failed five-year experiment — and the unwillingness of other companies to offer Medicare MSAs — suggest that only a tiny percentage of seniors are interested in the product. Therefore, plan providers can't find a way to make them financially viable.

So, even as Medicare Advantage grows, the Medicare Medical Savings Account remains an idea whose time has not yet come — and perhaps never will.

__Exit question: Did you ever use or consider a Medicare MSA plan?__

*[Images](https://soundmindinvesting.com/img/asset/Y2xvdWQvbWVkaWNhcmUtcGFydGMtMTMzMzUwODY0Ny5qcGc=?fit=crop-99-99-1&w=1660&h=896&s=65e18f7f868522d3244da49396c2d0e3) used with permission.*

One type of Medicare Advantage plan has struggled to attract plan sponsors and users. Now, it is almost gone: the MSA.

An Idea Whose Time Never Came: The Medicare Medical Savings Account

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