Don’t Let Medicare Surcharges Take a Bite Out of Clients’ Retirement

New white paper from HealthView Services offers strategies to reduce Medicare surcharges and increase net retirement income

Nearly every potential source of income is counted when calculating medicare surcharges. Nearly every potential source of income is counted when calculating medicare surcharges.

Retirees may be surprised when they see their Social Security checks diminished by Medicare premiums and income-based surcharges, according to a new white paper from HealthView Services.

“Surcharges will not only impact affluent Americans, but practically everyone with a moderate income,” said Ron Mastrogiovanni, founder and CEO of HealthView Services, in a statement.

Medicare imposes surcharges by measuring modified adjusted gross income – tacking extra payments onto premiums once income crosses a certain threshold, beginning at $85,000 for an individual or $170,000 for a married couple.

While the income thresholds are not expected to change over time, the paper points out, retirees’ incomes will rise with inflation, causing them to cross these thresholds and be susceptible to surcharges.

“These thresholds may seem high, but many retirees including those on traditional pensions are already crossing them,” said Mastrogiovanni, in a statement. “Since Medicare income brackets are not indexed to inflation, over time more retirees will be impacted.”

The paper, titled “Understanding the Impact of Modified Adjusted Gross Income on Retirement Health Care Costs: Strategies to Reduce Medicare Income Surcharges,” shows that crossing the first threshold can increase Medicare Parts B and D costs by approximately 35%, and surpassing the highest thresholds can inflate costs by more than 200%.

“In order to fully comprehend, manage, and even reduce the impact of surcharges, it is necessary to understand that MAGI incorporates almost every potential source of income — including working in retirement, Social Security, pensions, required minimum distributions, dividends, earned interest, and capital gains,” the paper states.

The MAGI also includes a two-year look-back period, which Mastrogiovanni explained in further detail in a statement.

“What takes a good many advisors and their clients by surprise is Medicare’s two-year look-back period, which means that any income earned at age 63 can be applied to the Medicare income algorithm when the subscriber signs up at 65,” said Mastrogiovanni. “Selling a house, for example, just prior to retirement could for example significantly increase Medicare premiums.”

Medicare currently provides health coverage to 50.7 million subscribers, as of 2012. By 2020, Medicare enrollment is expected to reach 64 million and by 2030, 81 million. But with a projection of only 2.5 workers to every retiree by 2030, the math doesn’t add up.

Measures like The Medicare Modernization Act, which was passed in 2003 to charge more to those who could afford it, and “means testing” for Medicare Parts B and D, which was officially introduced in 2007 to apply a “more you make, more you pay” to premiums, both aim to help pay for the program. But they come at a cost to some retirees.

The paper offers up some strategies that could help retirees plan, manage and potentially reduce these Medicare costs, such as “allocating savings for retirement health care and modifying a portfolio’s investment mix to lower Medicare-assessed income.”

Since specific types of income trigger Medicare surcharges, the paper suggests paying closer attention to how Medicare measures income earned from certain investment products.

Medicare identifies working in retirement, Social Security, pensions, required minimum distributions, earned interest, and capital gains all as sources of income.

“By modifying the mix of products in a portfolio, an advisor may be able to migrate a client into a lower MAGI bracket, decrease the surcharges, and increase net disposable retirement income,” according to the paper.

Products including life insurance, non-qualified annuities, Roth IRAs and Roth 401(k)s, health savings accounts, longevity insurance, and even a reverse mortgage can decrease MAGI and reduce Medicare Part B and D surcharges.

“[N]either the general public nor the financial services industry (with a few exceptions) has factored health care expenses or additional surcharges into retirement planning,” the paper states. “As a result, more and more retirees on fixed incomes will find themselves drawing upon funds allocated for other purposes to pay for these costs.”

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