Outside-IN

Outside-INblog

Outside voices and views for advisers

Tips for managing clients' health care expenses in retirement

Financial advisers should incorporate health care planning into their practices

Mar 27, 2017 @ 1:44 pm

By Jamie Hopkins

Flu shot displays are hanging throughout the CVS/Pharmacy on 42nd St in New York on August, 24, 2010. Photographer: Tom Starkweather/Bloomberg News.
+ Zoom
Flu shot displays are hanging throughout the CVS/Pharmacy on 42nd St in New York on August, 24, 2010. Photographer: Tom Starkweather/Bloomberg News.

Survey after survey shows that health care expenses in retirement are a top concern for clients, and financial advisers are finally taking notice. According to a 2017 Survey conducted by The American College of Financial Services, advisers reported that health care expenses topped the list of concerns of their retired clients. Despite these findings, many advisers struggle to seamlessly incorporate health care planning into the overall planning process. Even for the adviser who does not offer a full range of Medicare or health care insurance options, there are a number of ways to help clients get a better grip on their retirement health care expenses.

(More: Demographic shift of retirees to affect consumer spending)

Tip 1: Determine a reasonable estimate of retiree health care expenses.

While an adviser might have limited access to health insurance products, one thing any adviser can do is to help his or her client determine a reasonable estimate of health care costs. Estimating retiree health care costs requires an understanding and estimate of Medicare Part B premiums, Medicare Part D premiums, premiums for supplemental coverage and any additional out-of-pocket costs. In addition, advisers need to factor in a reasonable estimate for the effect of inflation on health care costs, which could raise the price tag by anywhere from 5% to 7% for the next 20 years.

Tip 2: Control MAGI to help limit Medicare premiums.

Medicare beneficiaries pay income-based premiums for Part B and Part D. In order to determine a client's premiums for the current year, the client's modified adjusted gross income (MAGI), which is simply adjusted gross income plus tax-exempt municipal bond interest, must be calculated for two years prior. For instance, if you are figuring out 2017 premiums, you need to look at the client's MAGI for 2015. Planning can be valuable when a client is approaching a new Medicare premium bracket, as one dollar over each threshold subjects the client to a higher Medicare premium rate. When developing an income plan, remember that certain distributions are not counted as part of MAGI-like withdrawals from a Roth IRA, a Roth 401(k), a reverse mortgage or the cost basis of a non-Modified Endowment Contract cash value life insurance policy. Additionally, using a qualified charitable distribution (QCD) after age 70½, in which up to $100,000 can be sent directly from an IRA to a public charity each year, can be a tax efficient way to manage required minimum distributions. Clients can meet required minimum distributions, and at the same time exclude the distributions from the calculation of the client's MAGI. A lower MAGI can mean lower Medicare premiums, and clients will appreciate the savings.

(More: Study finds most retirees want guaranteed lifetime income)

Tip 3: Avoid health insurance coverage gaps.

A client is eligible for Medicare benefits as early as the first day of the month in which he or she reaches age 65. However, for coverage to begin in that month, the individual must enroll before the birthday month as coverage will not start until the following month. Clients can enroll during the initial enrollment period, three months before they turn 65, the month they reach age 65 and the next three months after they reach 65, without facing a penalty. However, it is crucial clients understand that if they wait a month after their 65th birthday to enroll, they might be without health care coverage for a period of time. If the client waits any longer, he or she will have to wait until the next open enrollment period to enroll and that would not be until Jan. 1 to March 31 of the following year, with coverage not beginning until July 1 of that year. If a client misses his or her initial enrollment period, the client could end up lacking health insurance coverage for more than a year.

Tip 4: Avoid Medicare Part B and Medicare Part D late enrollment penalties.

No one wants to pay penalties, so help your clients avoid them by making sure they enroll in Medicare Parts B and D during the appropriate time period. Both Part B and Part D have the same initial enrollment period, which is the seven-month period around the individual's 65th birthday. The client will accrue a penalty if he or she does not enroll in Part D at the end of the seven-month initial enrollment period and does not have any other qualifying "creditable prescription drug coverage." The penalty is calculated by multiplying 1% of the "national base beneficiary premium" by the number of full, uncovered months in which an individual was eligible but did not have coverage. Part B enrollment can be delayed in some instances if the individual is still covered by an employer-provided health insurance plan, or by the spouse's employer provided plan, as long as the employer has more than 20 employees. Once that employer-provided coverage ends, the individual must enroll within eight months or be subject to a penalty. That penalty is calculated at 10% for each full 12-month period that an individual should have had coverage but was not covered. Proper planning in advance should ensure that no client has to pay Medicare penalties for Part B or Part D.

(More: Gray divorce presents Social Security challenges)

Jamie Hopkins is a professor of tax at the American College's Retirement Income Certified -Professional program. Follow him on Twitter @RetirementRisks.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

Upcoming Event

Oct 17

Conference

Best Practices Workshop

For the fifth year, InvestmentNews will host the Best Practices Workshop & Awards, bringing together the industry’s top-performing and most influential firms in one room for a full-day. This exclusive workshop and awards program for the... Learn more

Featured video

Events

Inside the first robo ETF

When it comes to exchange-traded funds, innovations come in all shapes and sizes. Check out Robo Global's Bill Studebaker discussing the first robo ETF.

Video Spotlight

Are Your Clients Prepared For Market Downturns?

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

10 best financial adviser jokes

How many financial advisers does it take to screw in a lightbulb?

With margins crashing, broker-dealers look to merge: report

Increased regulation is straining profit margins among broker-dealers, sending many of them into the arms of their bigger brethren.

Hackers may have profited from SEC breach

The hack of the agency's Edgar filing system occurred in 2016, but the regulator didn't conclude until last month that the cybercriminals may have used their bounty to make illicit trades.

Top 10 financial firms ranked by investor satisfaction

Find out which firm took the top slot for overall investor satisfaction for the second year in a row.

What not to say to clients when the markets drop

Here's what advisers should steer clear of saying the next time stocks turn downward.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print