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Health care costs can sink a retirement plan

Jun 10, 2014 @ 12:01 am

By Mary Beth Franklin

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What's the biggest cost most retirees will face yet is seldom included in a comprehensive retirement income plan? Retiree health care costs. And that oversight could sink many future retirement plans.

“There is an urgent need to address the retirement health care cost planning gap,” said Ron Mastrogiovanni, founder and chief executive officer of HealthView Services, a provider of retirement health care cost data. “The failure to do so will put millions of Americans' retirement security at risk.”

Despite growing concern about retirement health care costs, many financial advisers and their clients have yet to meaningfully integrate health care costs into retirement plans, Mr. Mastrogiovanni said. In the past, the problem was advisers didn't have the tools to calculate expected health care costs for individuals based on gender, health and other factors such as state of residency and income. Now they do.

Through a partnership with the Insured Retirement Institute, the HealthView Prime cost planning tool is being offered to IRI members of major insurers, asset managers, broker dealers and financial professionals. Individuals can use a free one-click version of the tool to calculate average retirement health care costs.

HealthView Services released a white paper Tuesday that highlights the coming retirement crisis, noting that retirement health care costs are on a path to exceed Social Security benefits for many Americans. The paper also outlines steps advisers can take to mitigate the impact on their clients' retirement plans.

According to HealthView's data, the inflation rate for basic health care is 5% to 7% per year. If this trend continues, the majority of retirees living on a fixed income will not be able to keep pace with health care costs.

For example, a 65-year-old couple living in Massachusetts today would pay about $7,020 for one year of coverage through Medicare Parts A and B, prescription drug coverage under Medicare Part D and a supplemental Medigap policy. But 10 years from now, their one-year health care premiums are projected to balloon to $11,536 — a 64% increase, according to the paper “Addressing the Retirement Health Care Cost Crisis: Cost Management Strategies.”

The problem only worsens over time. The HealthView paper shows that a 55-year-old couple today could expect their health care costs to nearly double from $11,536 during their first year in retirement to $22,981 10 years later.

Advisers need to be aware that Medicare premiums are means-tested. Higher-income retirees pay larger monthly premiums for Medicare Part B, which covers doctors' visits and out-patient services, and Medicare Part D, which pays for prescription drugs.

Advisers also need to understand that the modified adjusted gross income (MAGI) used to calculate those higher surcharges applies to all income, including the taxable portion of Social Security benefits and interest on municipal bonds that is not subject to federal income tax.

Higher monthly premiums apply to Medicare Parts B and D when MAGI exceeds $85,000 for individuals and $170,000 for married couples. There are four surcharge brackets.

“By smartly utilizing products currently available to investors that moderate MAGI thresholds, advisers may save affluent retirees $100,000 or more in retirement expenses,” Mr. Mastrogiovanni said. For example, income generated by using the loan provision of a cash-value life insurance policy or distributions from a Roth IRA are not included in the MAGI income calculation. Neither are distributions from a health savings account.

Although the vast majority of Medicare beneficiaries pay the standard $104.90 per month for Medicare part B, more than one-third of advisory clients are likely to pay higher Medicare premiums, Mr. Mastrogiovanni said.

Therefore, it is critical that advisers understand that their traditional drawdown strategy of claiming reduced Social Security benefits early and tapping investment accounts first in order to allow retirement accounts to continue to grow tax-deferred is creating a ticking time bomb for future retirement health care costs.

Large required minimum distributions from IRAs could push clients into higher Medicare premium brackets — which are not indexed for inflation. And, after one spouse dies, the surviving spouse may pay even higher premiums as his or her income remains the same, but premiums are based on the lower income threshold used for singles.

“We've been in the accumulation business for a long time and as an industry, we've done an extremely good job,” Mr. Mastrogiovanni said. “But as the market segment with the most invested dollars moves into the decumulation phase, the most competitive advisers are going to be those who focus on how to optimize Social Security benefits and mitigate rising health care costs,” he said.

(Questions about Social Security? Find the answers in my new ebook available at www.investmentnews.com/MBFebook for $19.95.)

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