Doing complex Medicare and tax bracket math

Retirement planning for most advisers consists of helping clients build a sufficient nest egg during the accumulation phase of their working lives and then formulating a plan to generate enough income to provide a comfortable retirement.

If they consider health care costs at all, it is usually in the context of making sure their clients have a long-term-care insurance policy. After all, retirees have Medicare, which is usually augmented by some type of supplemental policy, to cover most of their health care costs.

What advisers may not be considering is that Medicare could cost their clients a lot more than they think. In fact, just as advisers have to become experts in learning the best Social Security claiming strategies, they need to learn how Medicare rules could affect their clients’ bottom line in retirement.

One example: Medicare is means tested, which means that higher-income retirees are going to pay more for Medicare Part B, which covers doctor’s visits and outpatient services, as well as for Medicare Part D prescription drug coverage. A high-income couple could pay as much as $671.40 a month compared with a middle-income couple, who would pay $209.80 a month, just for Medicare Part B.

PREMIUMS CLIMBING

Another cautionary note: Medi-care Part B premiums have been going up at more than twice the rate of Social Security cost-of-living adjustments, so expect these premiums to climb even further.

As InvestmentNews contributing editor Mary Beth Franklin pointed out in her column last week, Medicare could turn traditional retirement planning on its ear. The standard advice to fund tax-deferred retirement accounts to the max during the accumulation phase could backfire. That’s be-cause as Medicare premiums increase, retirees could be forced to take more money out of their tax-deferred accounts, boosting their taxable income and pushing them into a higher Medicare premium bracket.

Some experts are concerned enough to suggest that younger clients saving for retirement through a 401(k) plan consider contributing only enough to capture an employer match. Other dollars could be put into products such as Roth individual retirement accounts that generate tax-free income during retirement.

Whether or not advisers follow these suggestions is up to them. They need to look at their clients on a case-by-case basis. But the overall point of Ms. Franklin’s column — that health care planning, especially as it pertains to Medicare, could be one of the most overlooked areas of financial planning — is well taken.

Advisers have a lot on their plate and are asked to do a lot. But the cost of health care is an area that warrants their attention. In the long run, their clients will benefit and appreciate that their adviser took the time to adequately prepare them for all aspects of retirement.