Healthcare costs are on the rise, but few people are adequately planning for how these costs will impact their overall retirement plan budget. Until recently, many financial advisors lacked the ability to help clients realistically forecast their future Medicare and healthcare costs, and plan for likely expenses. But today new tools are being developed that can aid retirees in assessing those costs and in figuring out ways to reduce them.
To help individuals do a better job of calculating their average retirement healthcare costs, the Insured Retirement Institute, an association for the retirement income industry, recently teamed up with HealthView Services, a provider of retirement health care cost data, to make the HealthView Prime cost planning tool available to IRI’s members. (For related reading, see: 5 Questions To Ask Before Hiring A Financial Advisor.)
Preparing for Retirement Healthcare Costs
With retirement healthcare costs expected to exceed Social Security benefits for many retirees, financial advisors should be taking steps now to help clients better prepare for and deal with what could become a difficult situation later on.
The inflation rate for basic healthcare is 5-7% per year, according to HealthView's data. That means that the majority of retirees living on a fixed income will not be able to keep up with their healthcare costs. (For related reading, see: What Does Medicare Cover.)
The HealthView paper entitled “Addressing the Retirement Health Care Cost Crisis: Cost Management Strategies,” noted that a 65-year-old couple living in Massachusetts today pays about $7,020 for one year of health care coverage spread over their Medicare Parts A, which covers lab tests and surgeries; Part B, which covers doctors' visits and out-patient services; Part D, which pays for prescription drug coverage, and a supplemental Medigap policy. In ten years time, those premiums are projected to increase by 64% to reach $11,536. So as a retiree continues to age, those costs will continue to rise. In fact, a 55-year-old couple today should see their health care costs almost double from $11,536 during their first year in retirement to $22,981 a decade later, the paper notes. (For related reading, see: Medicare 101: Do You Need All 4 Parts?.)
Advisers Can Help Retirees Lower Healthcare Costs
So how can a financial advisor better help their clients plan for and alleviate some of these rising costs? First and foremost, advisors need to point out to their clients that Medicare premiums are means-tested. That means that higher-income retirees will pay larger monthly premiums for Medicare Part B and Medicare Part D than lower income earners.
Secondly, advisors should be assessing their clients modified adjusted gross income (MAGI), which is used to calculate the higher surcharges. The MAGI takes into account the taxable portion of Social Security benefits and interest on municipal bonds, which are not subject to federal income tax. By contract, income generated by using the loan provision of a cash-value life insurance policy, and any Roth IRA distributions, as well as distributions from a health savings account, are not included in the MAGI income calculation. (For related reading, see: Shopping For a Financial Advisor.)
Based on the MAGI income brackets, those individuals whose income exceeds $85,000, and married couple’s who’s income exceeds $170,000, will pay higher monthly premiums for Medicare Parts B and D, than those whose income falls into a lesser bracket. There are a total of four income brackets used to define the MAGI thresholds.
Based on these figures, over one-third of advisory clients will likely have to pay higher Medicare premiums than the majority of Medicare beneficiaries, who will pay the standard $104.90 per month for Medicare Part B, according to the Healthview study. (For related reading, see: How To Find The Financial Advisor Of Your Dreams.)
Reducing Withdrawals May Hurt You
Financial advisors need to explain these nuances to their clients, so that they can better plan their retirement budget or make adjustments to improve it. For instance, the strategy of claiming reduced Social Security benefits before the age of 67, or allowing a retirement account, such as a regular IRA account to continue to grow tax-deferred, while withdrawing income from an investment account instead, may in fact increase one’s healthcare costs later down the line in retirement.
That’s because the required minimum distribution age from a regular IRA account is 70.5 years old, and if the amount being withdrawn is large, it could land some retirees in a higher Medicare premium bracket, which, by the way, is not indexed for inflation. Additionally, if a spouse passes away, the surviving spouse could find him or herself paying even higher premiums, while their income remains unchanged, as premiums are based on the lower income brackets used for singles. (For related reading, see: Find The Right Financial Advisor.)
The Bottom Line
Financial advisors would be wise to alert their clients — especially their wealthier ones — who are moving toward retirement how to better optimize Social Security benefits and IRA accounts to mitigate rising healthcare costs.