Healthcare costs are perpetually among the biggest challenges that retirees face. In a recent survey, three out of 10 retirees said that paying for healthcare costs was their single biggest financial concern.?
While most retirees count on Medicare during retirement, those with higher incomes pay proportionately more in Medicare premiums. Unlike other retirees, their Medicare costs can continue to rise even when Social Security cost-of-living increases (COLI) are frozen — as they were in 2010 and are again in 2011.
Financial advisors who can help higher-income retirees mitigate the rising costs of Medicare will find a growing and appreciative client base. A potential solution can be found by leveraging the simple power of tax-deferred annuities.
Why the Need?
Medicare Part B premiums represent the most common healthcare expense for most retirees. Medicare Part B functions similarly to traditional medical insurance, covering medically necessary services such as doctor visits, home health services and outpatient care. And like traditional medical insurance, the beneficiary must pay regular premiums.
Fortunately for most Medicare beneficiaries, the government pays a substantial portion of the Part B premium — about 75 percent — with the beneficiary paying the remaining 25 percent. However, that is not the case for retirees with higher incomes generated by Social Security payments, interest, dividends and other reportable sources.
Since 2007, higher-income Medicare beneficiaries have been required to pay a “means-adjusted” premium for Medicare Part B. In 2010, higher-income beneficiaries pay a Part B monthly premium equal to 35-80 percent of the total cost of Part B premium, depending on the income they report to the IRS. And “higher income” may not be as high you think. It’s defined as a single retiree with income above $85,000 per year, or a married couple with income above $170,000 per year. This is roughly equivalent to pre-retirement income of $106,250 (single) or $212,500 (married).2
According to the AARP, approximately 11 million beneficiaries are subject to these higher Part B premiums.3 And, because Medicare Part B premiums are recalculated every year, higher-income retirees could face escalating Medicare Part B premiums throughout retirement if their income grows due to investment earnings or cost-of-living increases.
Part B premiums for higher-income retirees also can increase even in years when there are no Social Security cost-of-living increases. Under current law, a “hold-harmless” provision is meant to protect retirees from Part B premium increases. The hold-harmless provision means that about 75 percent of Medicare beneficiaries don’t have to pay higher Part B premiums in years with no cost-of-living increase. But new retirees and higher-income retirees — who account for about 25 percent of Medicare beneficiaries — are not protected by the hold-harmless provision.