Alleviating Health Care’s Bite on Retirement Income

Health care costs continue to rise, but an approach utilizing the right investment vehicles and tools to gauge future health care expenses may help investors prepare for the worst.

Health care costs can take a bite out of retirement nest eggs in ways investors haven’t anticipated. Recently, the Centers for Medicare & Medicaid Services (CMS) announced hikes in Medicare Part B premiums and deductibles for 2017.

The deductible will climb to $183, a 10% increase from 2016. About 30% of people not protected by Medicare Part B’s “hold harmless” provision would be looking at premium increases ranging from $134 to $428.60, depending on their income in 2015. These include new enrollees, those not receiving Social Security, and higher-income beneficiaries. Because the 2017 Social Security cost-of-living adjustment is 0.3%, all other beneficiaries will see premiums rise to $109 in 2017, compared to $104.90 in 2016.

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And many experts agree that heath care prices won’t be reversed any time soon, making it even more important for people to plan ahead. “Next year, we expect to see an increase of a little over 22% for Medicare Part B,” says Ron Mastrogiovanni, president of Health View Services (HVS), a provider of software that projects health care costs.

The firm’s research indicates that health care inflation including Medicare Part B is expected to grow 6% annually for the next 10 years. These rising expenses highlight the need for plan sponsors and their advisers to relay to participants the importance of anticipating health care expenses in retirement.

In an interview with PLANSPONSOR, Mastrogiovanni outlined some strategies that plan providers and advisers can pursue to raise awareness and encourage participants to take action. First, he notes that it’s important to communicate to investors that Medicare costs vary immensely depending on income.

NEXT: Determining what Medicare will cost

“How do you prepare? Make sure that the investments that you’re going to be generating income from in retirement do not fall under MAGI [Modified Adjusted Gross Income],” Mastrogiovanni suggests. “That’s how Medicare determines the income bracket you’re in and what you’ll be paying.”

He notes that someone retiring with income of $85,000 or less can expect to pay $183,360 for health care in retirement; meanwhile, someone with an income of between $85,001 and $107,000 can expect to pay $250,407—a 37% increase. Those making more than $214,000 can expect to pay a 204% increase at $557,066.

Medicare surcharges also apply to beneficiaries with retirement incomes exceeding $85,000.

According to HVS research, “a 55-year-old who plans to retire at age 65, has a life expectancy of 86 and generates over $85,000 per year in retirement income will exceed MAGI thresholds and can expect to pay up to $373,706 in lifetime premium surcharges (in real dollars) in retirement.”

NEXT: The Right Product Mix Can Lower Medicare Costs

To navigate these regulatory burdens, Matrogiovanni suggests plan sponsors and advisers should educate participants about different investment vehicles that can potentially reduce tax burdens, and move participants into a lower income bracket once retired or eligible for Medicare. These include Roth 401(k) plans, health savings accounts (HSAs), and lifetime insurance policies.

Generally speaking, these products offer various tax advantages. For example, Roth 401(k) drawdowns won’t be considered taxable income. So it won’t affect an investor’s MAGI or push the individual into a larger income bracket as far as CMS is concerned. HSAs offer a “triple-tax” advantage

“If you take advantage of a universal life insurance policy and you utilize the assets that are invested in that policy in retirement as a portion of your income, it doesn’t get means tested; so, you don’t pay a surcharge,” Mastrogiovanni explains. “Those are three major products that most advisers in the country can advise their clients on. Today, we’re not just talking asset allocation, but the right product mix.”

While not all investors have access to an employer-sponsored Roth 401(k) or an HSA, some vehicles such as Roth IRAs may offer similar benefits.  

“People need to look at not only savings, but how they save,” says Mastrogiovanni. “It can significantly change what they are paying for health care.”

Cathy Weatherford, CEO of the Insured Retirement Institute (IRI), echoes this view. When asked about what plan sponsors and advisers can do to help participants address rising health care costs, she tells PLANSPONSOR that raising awareness and helping them develop a strategy should be the top priorities.

She also says participants can benefit from “shopping smart” for the right products with the help of plan sponsors and advisers.

This is increasingly important as Weatherford points out that IRI research suggests an alarming number of people under save for health care expenses in retirement.  

NEXT: Projecting Health Care Expenses

Weatherford notes that there are several tools such as retirement income calculators, which can help determine future health care expenses based on factors such as age, life expectancy, health conditions and even demographics.

However, it’s important to note that this technology is only as useful as the information being fed into it. One widely-used strategy when it comes to retirement saving is aiming for the right income-replacement ratio (IRR). In a report, HVS points out that this number can be misleading since it doesn’t always factor in figures such as life expectancy, unexpected out-of-pocket costs, and income-based surcharges. Moreover, Medicare income thresholds are not expected to be adjusted for inflation.

Another thing to relay to investors is the fact that health care costs vary greatly from what is spent during working years compared to what will be spent during retirement. “On average, 75% of your premium is paid by your employer in its plan,” Mastrogiovanni notes. “So, we don’t see this as a big hit. But when we retire, we’re going to be paying 100% of that, and we need to be prepared for that.”

Considering all these factors, plan sponsors and advisers can benefit from helping participants analyze their individual situations to gauge future health care expenses, invest in the right product mix, and navigate the complexities of how MAGI determines Medicare costs.

“One of things we find is that every person underestimates the amount they are going to need,” Weatherford says. “I think an adviser can help people start saving or to calculate what their income would look like in retirement. We have to do more of that and we have to do it earlier. The older you are, the harder it is to play catch up. The sooner people can begin that process and get knowledge, the better. Every ounce of knowledge we can give supports better behavior.”

Retirement Industry People Moves

Fidelity CEO Abigail Johnson to succeed father as chairman, and AB creates chief marketing officer role.

Fidelity CEO Abigail Johnson to Succeed Father as Chairman

Fidelity Investments Chairman Edward C. Johnson III said in an internal memo sent Monday that his daughter, CEO Abigail Johnson, will succeed him as chairman of the financial-services firm, according to published reports. Abigail will unify the two positions, while Johnson III becomes “chairman emeritus.” Periodically, he will consult with his daughter and the board of directors.

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In the memo, Johnson III described the move as a “natural progression of Abby’s 28-year career at Fidelity.” Abigail joined Fidelity Investments as a fund manager in the late 1980s before climbing to the rank of CEO in 2014.

Johnson III joined the firm in 1957 and took charge as chairman in 1977. Looking forward, Johnson III says he has never been more convinced of the company’s strength than now.

“As I step back from my management duties, I think it is appropriate to pause and reflect on where we stand as a company. Throughout Fidelity’s long history of growth, our dual commitments to our customers and to innovation have served us well. By investing in technology and using the kaizen method of continuous improvement, we have built a strong brand, industry-leading positions and multiple profitable businesses.

“While we have enjoyed much success, evolving customer preferences and new regulatory requirements are transforming the investment management industry. However, we are prepared to seize the opportunities in this changing, competitive landscape. I have never felt more confident about Fidelity’s future than I do now.”

NEXT: AB Creates Chief Marketing Officer Role

AB Creates Chief Marketing Officer Role
 
John Greer has joined AB (formerly Alliance Bernstein) as chief marketing officer, a newly created role for the global investment-management firm. Greer will oversee AB’s institutional, retail and corporate marketing initiatives, while focusing on leading innovation throughout all aspects of the firm’s marketing strategy.

“At AB, we’ve worked hard to innovate for our clients and deliver a set of services that perform well across market cycles,” says Robert Keith, head of AB’s Global Client Group. “John is a leader with an impressive track-record in building memorable, global financial brands through cutting-edge marketing strategies to both retail and institutional audiences. We’ll harness these strengths to serve clients more effectively as we look to expand our presence in key markets and verticals.”

Prior to joining AB, Greer spent 16 years with Franklin Templeton Investments, where he spent more than 16 years in executive-marketing roles including head of U.S. retail marketing, head of global marketing division, and chief marketing officer. He also led advancements in the firm’s digital marketing efforts, and led the establishment of the firm’s global product development committee. He co-chaired that division for several years. Furthermore, Greer served as chair of the Global Brand Committee. Prior to joining Franklin Templeton Investments, Greer spent nearly two decades in direct marketing and advertising.

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