Medicare—Surprising facts and critical changes

The goal in retirement (or financial independence after age 65) is to be able to support our lifestyle using accumulated assets, Social Security and Medicare. It has become evident that Social Security and Medicare had to change to continue to sustain future retirees. The loss of the Social Security ‘file and suspend’ strategy for anyone who is not 66 by the end of April, 2016 has received a lot of media attention. Yet, major changes in Medicare have garnered much less publicity although no less important to retirement planning.

From our retirement planning vantage point, we believe the new Medicare changes will add a significant wrinkle to what is a already a very fine balance between distributions from portfolios, income tax liability, and funding our client’s ideal retirement lifestyle.

This short educational article outlines a few surprising (even shocking) facts that everyone should know about Medicare. For more details (particularly those approaching 63 or are two years from switching to Medicare from employer plans), I recommend that you read, in detail, the annually released official US Government Medicare Handbook. The 2016 version of this booklet is available at https://www.Medicare.gov/pubs/pdf/10050.pdf

  • Medicare Alphabet Soup (A, B, C, D) are not all free – The 2.9% current premium paid to Medicare on your earnings while employed only provides for free Medicare Part A coverage. Part A only covers hospital insurance, not comprehensive health insurance. Medicare Part A participation, however, does provide access to the other Parts that, when taken together, can constitute a comprehensive health insurance plan able to meet specific needs. Part B is basic medical insurance. When combined with Part A it is termed “Original Medicare.” A and B combined isn’t enough to cover everything you’ll need. Part D is a premium paid for drug insurance. It is incredibly complex as specific drugs fall in and out of favor within each plan. On the other hand, Part C is an integrated health plan that usually includes Part A, B, and D. It is often called “Medicare Advantage.” Finally, you may encounter Medigap coverage (which has its own alphabet soup) to cover areas missed by Medicare A, B, C or D.
  • Basic Costs: Average costs are difficult to estimate and are often not as low as many expect. Part B would seem very well priced at less than $1,500 per year and yet in the real world we seldom find these ideal rates. Instead, we find health insurance through Medicare averages around $4K-6K per person per year. Moreover, rates are expected to rise significantly in 2018 because of surcharges.
  • Enrollment in Medicare is not all automatic and requires strict attention to timelines. Timelines appear long (for example, 7 months for the initial enrollment) but to avoid penalties and loss of coverage you will need to act early in the timelines (most wait until their birthday month and may find that they have a gap in insurance coverage even though they make the enrollment timeline). To avoid penalties, initial enrollment into Medicare is 3 months before your birthday month and extends to three months after. If you have approved coverage (for example, from an employer health plan) and need to transition to Medicare you will have a “Special Enrollment Period” with its own timelines that must be initiated prior to leaving your employer approved health coverage (excluding COBRA).
  • There are hefty penalties that stay with you for life if you miss an enrollment timeline – Penalties for missing enrollment timelines into Part B are currently an additional 10% of your normal premium cost for every 12 months delayed. Part D penalties are 1% per month delayed. These penalties continue throughout your enrolled life, meaning that you’ll pay more for the same coverage. For example, if you enroll 3 years later than required, the premium you pay for the same Medicare Part B coverage is 30% higher. If you also missed enrolling in Part D, the premium is 36% higher.
  • Once you enroll in Medicare you can no longer make H.S.A. contributions. Once you begin collecting Social Security you are required to enroll in Medicare Part A, which eliminates your ability to participate in certain plan features. For example, it disallows the annual tax-free H.S.A. contributions.
  • There is free personalized health insurance counseling. You should use it to design the best plan for yourself and to fully understand what you need to do each year to make the most of the health care plan you chose (given your expected annual health care needs). In addition, work closely with your Wealth Manager to ensure that you distribute your wealth in the least costly manner given your lifestyle and available assets.
  • Not all health insurance plans are available in all locations. When planning your Medicare health plan, use the community you are planning to retire into to get the most accurate list of health plans available. There is also a 5-Star rating website, provided by Medicare, to help you choose the best available plan in your area.
  • Since 2007 Medicare has been MEANS tested (i.e., dependent on income). Additional income-based premiums can come as a surprise, but what is perhaps more shocking are the new income limits that will begin in 2018. For the moment, surcharges to Medicare premiums begin at $85K and $170K MAGI (Modified Adjusted Gross Income for those filing as single or married filing jointly). Currently, the surcharges top out at $390/month or $4,700/year for Part B for those with MAGI greater than $214K and $428K (single versus married filings). Separate surcharges apply for other Parts. But take note—starting in 2018, the surcharges will apply to a lower MAGI. The largest surcharges will be for those with MAGI over $160K and $320K. An additional surprise is that the earnings that will be used to calculate your Medicare Premium surcharge (also known as the annual “Income Related Monthly Adjustment Amounts” or IRMAA) will be based on your income tax filing from two years earlier. For example, if you enroll in Medicare in 2018 they will use your 2016 taxes to estimate your IRMAA (there is a process to appeal surcharges).
  • The income included in determining additional premiums is based on your adjusted income PLUS any tax-free income (such as Muni bond interest) – MAGI (in these scenarios) includes all ordinary income (work earnings, pre-tax withdrawals, pensions, etc.), plus 50% of Social Security collected, plus tax exempt interest. It doesn’t include H.S.A. or Roth distributions or loan proceeds. Annual distribution will now need to be tightly connected to your MAGI.
  • A “cost of living” gift from the ‘Hold Harmless’ rule – For some, the “Hold Harmless” rule provides additional premium savings. This benefits those who have their Medicare Part B deducted directly from their social security. This rule prohibits increases in Medicare Part B premiums when there is no similar increase in Social Security benefits. The ‘Hold Harmless’ rule evaporates for anyone not deducting their premiums from Social Security, or if they pay additional premium surcharges (because of income limits), or if it is their first year in Medicare (plus a few other exceptions).

These changes to Medicare (and likely new changes in the future) will make it essential that your accumulated wealth be deployed in a manner that will allow you to have the necessary cash flow for your chosen lifestyle while maximizing the various MEANS adjusted benefits.

It has always been our recommendation that clients have more than just pre-tax savings, Social Security, and a pension to support their retirement distribution. Going forward, Roth and H.S.A. savings will unquestionably become even more powerful adjunct retirement planning tools since they are tax free and not part of Medicare MAGI Means testing.

Know the facts about Medicare. An educated consumer is better equipped to make sound choices leading up to retirement and much more likely to secure the retirement lifestyle they have in mind.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Start of the Year Planning

I’m often asked “how do I make sure that I (and my family) stay on track with
our finances?” Following are a few pointers to start the New Year off right.
Keep in mind, this isn’t about making resolutions (we all know how that goes), but
rather, building sound financial habits that will set you, and your family, in
good stead, now and in the future.

(1) TAKE STOCK. If you haven’t done so already, the first place to start is to
take stock of what was actually accomplished in 2015. This will be easier if you combine it with your preparations for filing your income tax. As a family, tally all of your statements (we send you a summary of the investments we manage but we’re willing to help you summarize your other assets as long as you send a year-end statement). This shouldn’t just be one person’s job – the point is to use the opportunity to enhance everyone’s awareness of how the money was earned and spent last year. It is also a time to see how well the reality matched the goals set at the start of 2015. Before you move forward you need to take stock of those items you can control. Don’t get too hung up on performance—the markets behave as they will and you’ll come out ahead as long as you have a low cost, high quality, diversified portfolio. Once you have such a portfolio, it is MORE important to determine how well you enjoyed the year than just
analyzing your spending habits.

Was this a good year for you? If so, what made it good or what made it less
enjoyable? As a family, what would you keep and what would you avoid
earning/spending if you had a choice? Life is about learning from what we do
and what we value but it should be based on your reality and your values.
Come away knowing how the year met with your expectations for a good life.

(2) DON’T GO IT ALONE. Think about how you can include others in this
process. This is particularly important in families where one person takes a
larger share of the family’s financial responsibilities. This “Start of the
Year” planning is an opportunity to develop closer communication
with anyone who is important to your financial future. First share
what was accomplished in 2015 and then decide what the family might want
or need in 2016. Do not forget that once you have set your goals you might
want to include financial professional(s) to ensure that you maximize and
implement all that is available. The power of building a strong financial
rapport over years will become evident during annual planning and when life
reveals unusual financial challenges.

You might also want to use this opportunity to share relevant annual decisions
and your process with any dependents so that they become participants in
helping the family attain goals for each year. For children this can be an
excellent learning experience and evidence of how finances are discussed and
handled in a family.

(3) GET BUY IN AND ACCOUNTABILITY. It is best to commit to
writing what was accomplished in 2015 and what you are targeting
in 2016. You should set a quarterly check-in to be sure that everyone is
committed throughout the year to what is decided at the start (this is most
important for the first couple of years and until this process becomes habit). The aim is to keep everyone on track and to determine if the goals and objectives are indeed
attainable.

(4) TRACK YOUR PROGRESS. Ideally you’ll let us help you track your
progress throughout the year by checking in with us, but we also encourage
you to make it a habit in your home.
Making financial decisions can be challenging at the best of times, if only
because they tend to have a ripple effect that isn’t always predictable.
Remember—when taking stock and making plans, it helps to keep the lines of
communication open, control what you can and target those things you value.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Fiduciary Advice – an update

Financial Decisions Driven By What is Best for You

I read volumes on how banks, insurance and brokerage firms are providing their clients with ‘cost free’ financial plans.  It never fails that when I review these ‘cost free’ or ‘low cost’ financial plans that they are, at best suitable but never the best choice for that client.  I’ve yet to review a financial plan that was ‘free’ or ‘ low cost’ and yet addressed fully and appropriately what was critical in their entire financial life.

Today I read an article by Ann Marsh that agrees with my position and highlights that the CEO of the largest Registered Investment Advisory firm is now a fiduciary evangelist.  (Maria Elena Lagomasino in Florida was highlighted in this article at http://www.financial-planning.com/news/genspring-family-offices-takes-fiduciary-approach-to-family-office-2676764-1.html ).

Lagomasino and others in this article speak about the unfortunate number of “planners at large banks and brokerage houses that run their business to benefit themselves as much, or more, than their clients.” She adds some startling statistics and says, “about 90% of the investors out there think they are talking with somebody who is an advisor, and instead they are really talking to a broker who is not working under that standard.”  She points out that the prevailing ‘suitability standard’ is not enough and that all advisors need to follow the fiduciary standard.

It is encouraging to hear others describing my belief, that all investment advice should be first and foremost ‘best for the client’ and not just suitable for the client.  It is for this reason that we don’t accept commissions and offer multiple ways to work with clients. I want the client to know that we are different and are driven to follow what is best for them not just sell them something suitable.  Although commission and assets under management are the common ways to offer financial advice we provide our services through hourly, project retainer, or assets under management models.  Under each model our goal is to always help our clients make the best decision for their specific situation while charging a reasonable amount for our services.

The fiduciary model requires that we sometimes tell clients what they don’t wish to hear.  For example, the markets are volatile and will likely remain so in 2012.  If clients do not understand that cash remains an asset class then it is time that we educate them.  If they are told by others to invest in alternative potentially high yielding investments it is our role to evaluate and tell them why this may/may not be appropriate for them.  What I know to be the best answer for them today should drive my advice and there should be no temptation to modify that answer with what may be suitable but good for our bottom line.

I have a passion for financial education, transparency and freedom of choice.  I strongly believe that an educated investor when provided with transparent choices will make the best choice for them.  If advisors all acted in a fiduciary manner then I would no longer review plans that land clients in positions that are not appropriate for their situations and who thought they had been paying for advice that was tailored to their specific needs.

If you are an advisor I challenge you to create a fiduciary based advisory process and evaluate your success, at least partially, on whether your clients reach their goals.

I always recommend that individuals learn as much as they can and seek advice from someone who practices under a fiduciary model that always puts a client’s best interest before their financial bottom line.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com