Healthcare Costs

It seems like every spring season there is a new healthcare amount announced by Fidelity Investments for people who are turning 65 during the year and this spring season is only slightly different from the last.

This difference lies in the total cost or the reduction of the overall cost of projected healthcare, which Market Watch, ABC, Kiplinger’s and even Nationwide is also heralding.

For those who are 65 years old today and entering into retirement today they are being told by Fidelity and the financial community to prepare for a total cost of $220,000 for their healthcare in retirement which, just happens to be a reduction from the previous year when Fidelity pegged the total cost at $240,000.

Being a financial professional who has been working on this specific niche for close to 6 years I am often asked if Fidelity is right about their number or not and what I will always say before rendering a conclusion is "that right or wrong at least Fidelity is bringing awareness to the subject”.

Believe it or not the cost of healthcare and planning for it has yet to be taken seriously by the financial industry in any circle, even with the government, the media and the public demanding information on a daily basis. So when a firm like Fidelity decides to throw its weight behind the topic it is hard to be critical…even when the number they use is really not close to the mark.

And the reason I state that the number is not really close to the mark and could go out on a limb and state that it may not be in the best interest of people to plan around it is due to how Fidelity’s is calculating the number itself.

According to the disclaimer that Fidelity uses the $220,000 is derived by taking “into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care” and this is for those “individuals (who) do not have employer-provided retiree health care coverage, but do qualify for the federal government’s insurance program, Medicare”.

Fidelity also pegs the average couple of having a life expectancy for males at the age of 65 today to be 82 years old and females who are also 65 today to have a life expectancy of 85.

With knowing how Fidelity calculated that $220,000 amount all we have to now do is look at what is already being provided to us by Medicare and some other sources.

In 2014 we know that:
  • Medicare Part B will cost a person $1,258.80 for the year (based on income).
  • Part D, according to Q1medicare.com, on average will cost an individual $645.60 for the year in just premiums (please keep in mind that this premium varies by residency, income and health).
  • For the other costs, which Fidelity states are the “certain services excluded by Medicare” they are typically covered by a MediGap Policy Plan F (it covers all of the gaps created by Parts A & B) which according to Weiss Rating is $1,952 per person for the year (please keep in mind that this premium varies by residency and health).
 

By having these known variables it can, simply, be concluded that the national average total cost in just premiums for the yea,r for a person who is 65 today is $3,856.40 and for a couple that total is $7,712.80.

From here all that is needed to understand this number of $220,000 more closely is the inflation rate over the period of time that this couple is expected to live, as according to Fidelity.

By just using simple math on an Excel Spreadsheet one would find that in order to reach the amount of $220,000 the inflation rate across the board for each type of coverage has to be just above 3.72%.

The question going forward from this point is 3.72% the inflation rate that should be used when speaking to clients about a subject as important as their health, especially when there are other sources that can be used?

Not according to PricewaterhouseCoopers as PwC, in its recent report “Medical Cost Trends” is reporting that the overall healthcare inflation for all ages is expected to be 6.5%.

And according to our very own government, through Medicare, the projected inflation rates for Parts B & D  are expected to be somewhere between 6% to 9%, with the final number all coming down to how low the reimbursement rate for care providers can go. So when you hear about the 2 Midnight Rule please realize that it will also impact how much your healthcare will be in retirement too.

Now, obviously, if a higher inflation rate is used there will be a higher number that is expected as a cost that each retiree will incur, but even with this varying, possible higher rate of return the red flag should really be the question about the odds that a person will have to actually be able to buy health insurance at the national average.

If a couple just happens to reside in a state like Florida, where plenty of people seem to like to retire too, the MediGap Plan on average is not $1,952, it’s higher at roughly $2,826 and this is not the highest premiums either.

For Part D the problem is the same, especially in Florida, instead of the average cost being $645 it is close to $750 a year and again this is not even near the highest premium too!

Unfortunately, the real healthcare number is not one that should be ballparked as people and their health are as different as anything can be and once we factor in the secret of means testing everything may just get thrown out the window anyway.

See there are other factors besides residency when it comes to the cost of your health in retirement and one of the biggest factors just happens to be your income, which Fidelity does disclose that the Medicare Income Surcharge is not being implemented at all in its $220,000 amount.

Due to the Medicare Modernization Act of 2003 and the Affordable Care Act a retiree’s Part B & Part D premiums will be based on income too. This means that Medicare, along with Social Security and the IRS will look at a person’s income to see if they are earning more than the average amount determined by the government in a given year and if there is more income being earned than the set limits then the person and spouse will be surcharged a higher fee.

So what happens if a person happens to be earning too much income in retirement?

Well according to Medicare the person and their spouse will be hit with an extra 40% to 220% more in premiums for Part B and an extra $145.20 to possibly $831.60 for Part D premiums.

But, will your clients actually get hit by this surcharge?

The answer, as everything inside health costs, is it depends and keep in mind that since the implementation of this “surcharge” in 2007 there were only about 5% of all beneficiaries impacted by this, but, unfortunately the number has risen to about 11% since then.

Please keep in mind that according to the 2014 Presidential Budget, on page 38, it clearly states that there may be adjustment in this Medicare Income Surcharge bracket until “25 percent of beneficiaries under Parts B and D are subject to these premiums”.

The Budget is also calling for, starting in 2017, when the oldest Baby Boomers reach the age of 70.5, where they have to take their Required Minimum Distribution (RMD) from any tax deferred accounts they have, a restructuring of the “income-related premiums under Parts B and D by increasing the lowest income-related premium five percentage points, from 35 percent to 40 percent and also increasing other income brackets until capping the highest tier at 90 percent”.

By the way, Social Security defines income as everything on lines 37 and 8b of a person’s IRS form 1040, which is income from things like: Wages, Social Security, Income (Rental & Pension), Capital Gains, Dividends (including those from Muni-Bonds) and withdrawals from any tax deferred account with the exception of Roth accounts.

Ultimately, everything but certain types of Life Insurance, specific Annuities, Roth accounts, 401(h) accounts and Health Savings Accounts are considered to be income.

With this information can it be concluded that Fidelity’s number is accurate or not?

That is for you a to decide, but to quote or use a number that may be using a much lower rate of inflation than provided by the government and one that is using just “averages” when dealing with your or someone else's health is sort of dangerous, but again, Fidelity must be given its due for at least picking up the torch and shinning the light on this subject.

Because of Fidelity people will be better prepared to plan for not only their largest expense in retirement but also their greatest asset – their health.

By the way, certain Medicare premiums and all surcharges will be deducted automatically from a person’s Social Security benefit. This means the more income one has the higher health costs they will have, thus resulting in having a lower Social Security benefit.

Some simple ways to help control health costs, lower taxes and save  income in retirement are the implementation of certain types of Life Insurance, very specific Annuities and the simplest way: Roth accounts or more specifically Roth 401(k)'s.

The problem of health costs in retirement is a very large, but the great news is it doesn't have to be. It just has to be on the radar correctly, because "What you don't know about retirement will hurt you".

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