In this series, we provide our readers with two distinct perspectives on the same topic — one from an academic, the other from a practicing financial advisor.
QUESTION: How do you plan for health care expenses in retirement?
THE ADVISOR — JOE ELSASSER, CFP, PRESIDENT, COVISUM:
We’ve all seen the huge numbers associated with health care costs in retirement. When discussing these costs with clients, many find the numbers to be so large that they cause paralysis and create a barrier to making meaningful improvements to their financial plans. Health care costs in retirement can be discussed in terms of maintaining an appropriate balance between premium outlay and total cost exposure — not unlike the discussion in many other areas of the client’s life, like the decision to take a higher deductible on an auto or homeowners policy. For clients who are comfortable with greater uncertainty in their total expenditures, minimizing insurance costs will be the priority. For those who need a higher level of predictability, paying higher insurance premiums will make sense.
What are the costs to consider?
- Medicare Part B premiums: Most people pay a base premium of $134 per month for Medicare Part B doctors and outpatient coverages. Some people with lower Social Security benefits pay less, due to the “hold harmless” provision that prevents the take-home amount of a Social Security check from being reduced due to an annual increase in the Medicare Part B premium.
- Medicare Part B premiums surcharges: Some people pay more for Part B. The higher your modified adjusted gross income (MAGI) is, which in this case is equal to your adjusted gross income, plus nontaxable interest income, the higher your premium will be. For a couple with income over $320,000 in 2016, the surcharge will be $294.60 per month. In other words, a married couple with MAGI over $320,000 would pay over $10,000 for Part B costs in total, including the base premium plus the surcharge.
- Medicare Part D premiums and surcharges: Medicare drug plans carry a premium and also have surcharges based on income. The lowest premiums for 2018 are in the $15 per month range and, depending on the client needs, coverage can be as high as $200 per month. For people with incomes over $320,000 for a couple or $160,000 for an individual, the surcharge would be an extra $74.80 per month per person on top of the base plan cost.
The base costs and surcharges can add up quickly. Strategically managing what income sources are used at certain points in retirement (nonqualified, Roth accounts or life insurance) can help reduce or avoid the premium surcharges.
Base Medicare premiums and surcharges are really only a part of the discussion. Another significant cost consideration is out-of-pocket costs. Those costs include the approximately 40%1 of total health care expenditures that stand-alone Medicare doesn’t cover, including deductibles, co-pays, and extended care. To manage the out-of-pocket costs with a minimum of premium outlay, clients should consider a Medicare Advantage plan (also known as Medicare Part C) and plan for potential extended care expenses through a reserve fund or dedicated assets. For clients less comfortable with significant out-of-pocket costs, a Medigap policy and long-term care insurance should be considered.
Ultimately, the discussion about health care costs is all about maintaining the client’s ability to reach his or her goals in terms of quality and setting of care, while paying the minimum premiums necessary to make those goals a reality, both now and in the future.
(Thanks to medicarebackoffice.com, a related company, for current premium estimates).
 Employee Benefit Research Institute, Savings Needed for Health Expenses for People Eligible for Medicare: Some Rare Good News pg 1, 2012.
THE QUANT — RON PICCININI, PH.D., DIRECTOR OF PRODUCT DEVELOPMENT, COVISUM:
The Roman playwright, Terence (c.185-159 B.C.), is credited with the Latin proverb “Ipsa senectus morbus est.,” which roughly translates to “Old age is a disease in itself.”
In 2010, a study by Anthony Webb and Natalia Zihvan of Boston College’s Center for Retirement Research estimated the average cost of health care for a couple aged 65 to be $197,000, with a 95th percentile of $311,000, assuming they had no need for a nursing home1. With nursing needs added to the equation, the average jumped to $260,000, with the 95th percentile at $570,000. In 2014, Kiplinger estimated the average cost of for the same couple at $220,0002. In 2017, Fidelity pegged the average cost at $275,0003. If health care costs continue to rise at the current 5% to 7% per year, the cost for a 45-year-old couple will come to around $600,000, in today’s dollars, when they reach the age of 65.