Fifty years ago this year, both Medicare and the Grateful Dead got their start.
Today, all the surviving members of that famous San Francisco band are eligible for Medicare. It's a fair bet that they, like most people in their age group in 1965, didn't pay attention to the law that President Lyndon B. Johnson signed that year — let alone realize how integral the program would become to American culture.
One of the most dramatic changes in Medicare over the past five decades is the method used to set some of the biggest out-of-pocket costs for beneficiaries.
In the beginning, beneficiaries paid $60 a year for Part B coverage — an amount so small that people hardly noticed it coming out of their Social Security checks. There was no such thing as a Part D plan in 1965.
Now, in addition to prescription drug coverage, certain Medicare out-of-pocket costs are adjusted based on income. The more people make, the more they pay — without getting any more benefits.
This year, each Medicare recipient (except those with very low income) pays between $1,259 and $4,878 for income-related Medicare Parts B and D charges. Going $1 into the next bracket will cost your clients hundreds or thousands of dollars more year over year. Conversely, going $1 down into the next bracket can save equally as much.
As you know, paying for Medicare does not stop here. In addition to these income-related charges, folks will pay Medicare copayments, deductibles, Medicare D premiums and supplemental coverage premiums. By the way, for most people all of these costs are in the form of after tax dollars, making the price tag even higher.
The good news is there are ways that advisers can help higher-income clients position themselves to avoid paying unnecessarily high Medicare costs. By focusing on maximizing non-reportable income and cash flow, you can minimize beneficiaries' Medicare Modified Adjusted Gross Income, or MAGI. It's more important than ever to get a copy of clients' tax returns to project their MAGI bracket and make appropriate modifications in the retirement plan when there is still time.
It is easy to determine the MAGI by looking at the IRS 1040 form. Here is the formula: MAGI = Adjusted Gross Income (line 37) + Tax-Exempt Interest Income (line 8b).
The Social Security Administration, the government agency that determines beneficiaries' income-related Medicare charges, uses the tax return from two years prior to the current year. For example, the 2013 tax return is used to set rates for 2015. A person's tax return when they are 63 years of age is the first base year used to determine their Medicare MAGI. The MAGI brackets are set in law through 2019 and can be used to benchmark where your clients may be and adjust the retirement planning strategy accordingly.
Here are some simple retirement planning steps to follow:
Get a copy of your clients' tax return every year.
Figure out the MAGI and associated income-related Medicare costs. Remember those costs are per person, so multiply by two for a couple.
Consider appropriate retirement planning strategies to maximize non-reportable income and cash flow. Some solutions worth considering are ROTH IRAs, health savings accounts, certain life insurance and annuity proceeds and reverse mortgages.
You can use that information for planning as clients move closer to and into retirement. The effect will be minimizing unnecessary decumulation from the retirement nest egg and a very satisfied client who is not surprised by unplanned expenses. By following these simple steps you will be able to help your clients keep on truckin'!
(Want to get more out of Medicare? Download my e-book at InvestmentNews.com/medicareguide.)
Katy Votava, Ph.D., RN, is president of Goodcare.com, a consulting service that works with financial advisers and consumers on health care coverage.