U.S. Debt is over $20 Trillion…don’t worry about it, you will pay it down…really.
- 401(k), Fidelity Health Care, financial planning, Hold Harmless Act, IRMAA, Medicare, Part B, Retirement, Roth, Social Security
It is being reported that the U.S. debt is over $20 Trillion and for many there is a belief that there is no turning back as there would appear to be no ability to even attempt to pay off this huge amount let alone some of it…unless of course there are some reform to how our nation’s government spends our tax dollars.
Well, thankfully, depending on who you ask, it would appear that there is some hope on the horizon in terms of generating revenue for the country to pay down the debt and it just so happens to be already enacted.
It was once said by a former politician that by passing healthcare legislation the ability to pay the down deficit could finally be reached and that former politician just happens to be spot on as he/she probably knew about Medicare.
Yes, what some current politicians are calling, Medicare for all, just may be the nation’s savior, but for many, especially those that planned on retiring with assets they may not feel the same way.
In 2003 Congress passed the Medicare Modernization Act which placed a surcharge on specific Medicare premiums, Part B, then in 2010 the Affordable Care Act was also passed and it placed a surcharge on Medicare premiums, but that was for Part D (prescription drugs).
These little surcharges just happen to be Medicare’s Income Related Monthly Assessment Amount (IRMAA) and it impacts any retiree who happens to be generating too much income in retirement.
The good news is that the amount of income has been set kind of high (individuals earning under $85,000 a year and couples earning under $170,000 have nothing to worry about in terms of surcharges), but the bad news is how the federal government is defining income.
Some examples are: wages, tips, interest, Social Security benefits, pensions, rental income, most capital gains, all dividends and any distribution from any qualified tax deferred financial instrument…that is right, your traditional 401(k).
So basically, for an individual who happens to be 55 years old, is earning $75,000 a year, investing $12,000 into their company’s traditional 401(k) which is earning 6 percent, has already saved $250,000 and plans on retiring at age 70 they should expect to be impacted by IRMAA year one in retirement.
With Medicare premiums inflating, historically, at over 7.5 percent they should expect to pay an extra $247,000 to the federal government in forms of surcharges for their health coverage throughout retirement, until age 90.
Doesn’t sound like much, but look at in terms of demographics, with 77 million Baby Boomers heading towards retirement in order to just pay down just $5 trillion of deficit would mean just 25 percent of the Boomers would need to fall into this category of earning $75,000 a year, investing $12,000 a year into their traditional 401(k) and retiring at age 70.
This percent just happens to correspond with the 2014 Fiscal Budget that called for maintaining “income thresholds associated with income-related premiums until 25 percent of beneficiaries under Parts B and D are subject to these premiums” (see page 38).
By the way, for those that happen to have saved or are saving more in their traditional 401(k) and who happen to be earning an even higher wage, well, they get to pay even more for their health coverage in retirement.
The even better news: all of these IRMAA surcharges, according to the Medicare Board of Trustee report, are deposited directly into the general fund of the U.S. Treasury, which will help out for our future…so thanks for that.
The other caveat, thanks to a change to Medicare’s Hold Harmless Act in 2009, anyone subject to Medicare’s IRMAA won’t be afforded protection from seeing their Social Security benefit being decreased by Medicare Part B premium increases.
With federal regulations stating that the bulk of Medicare premiums being deducted automatically from Social Security this person will see their Social Security benefit decreased by an average of 30 percent throughout retirement.
This just happens to equate to about $420 Billion that the federal government will not have to pay out to those 25 percent of Boomers who invested wisely and the even better news is that this also does not include the other retirees who will not be impacted by Medicare’s IRMAA.
For those who are not subject to the surcharges they won’t see their Social Security benefit decrease due to increases in Medicare Part B premiums but, they should expect to see their Social Security benefit to remain stagnant as Medicare premiums are inflating faster than Social Security’s cost of living adjustment (COLA).
The solution for this person is simple, instead of investing today in a traditional 401(k) where the income will be used against them later in life, they can opt for Roth 401(k) as that income in retirement does not count towards Medicare’s IRMAA.
But, thankfully, many financial professionals, as well as employers, preach about the tax savings later with traditional 401(k)’s and the ones that will be left holding the bag to pay down the debt will be just ordinary citizens who opted for this advice.
Maybe a change will come when a savvy lawyer or law firm figures this out and realizes that federal regulations are not being applied in a prudent way in the eyes of the “fiduciary rule” as healthcare is not being planned for accordingly, but thankfully, there are no savvy lawyers out there… yet.
Yes, the nation’s debt is out of control, but there have been measures created by the federal government to ensure that a good portion of it does get paid down, the only problem is that those who are trying their hardest to maintain their lifestyle in their retirement are the ones who are going to be stuck paying a good portion of the bill.
Dan McGrath is considered to be a leading authority on the subject of how health related costs in retirement will affect both retirement as well as the overall the financial planning process. Mr. McGrath has also authored the bestselling retirement planning book “What you don’t know about retirement will hurt you” as well as “Medicare: A Practical Guide to Understanding Your Health Coverage in Retirement”. http://www.jesterfinancial.com
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