One of the greatest concerns the general public has is how to fund for all of the costs associated with health care in retirement. The proverbial elephant in the room is the simple fact that this one expense is either not being addressed at all, or, at best, the probability of it being properly planned for is low.
Believe it or not, having to have health coverage in retirement has been mandatory for more than two decades now. In order for a retiree to collect and keep receiving their Social Security benefit, they must also accept Medicare when eligible. Again, this expense has never been factored into a financial plan.
The problem lies in the fact that not only is Medicare not free, as it does have specific costs which are deducted directly from any Social Security benefit a retiree may receive, but that it is also means tested.
Starting in 2007, due to the Medicare Modernization Act Medicare of 2003, Medicare has been determining the amount of seniors’ Medicare Part B & Part D premiums based on the amount of income they have. Simply stated, the more income they have equates to the more they will pay for these premiums.
Why this will become such a factor in 2018 is simply because of how Medicare determines who will be impacted by this means testing.
The current rules state that Medicare, after communicating with the IRS, will look at person’s previous year’s tax return to calculate how much income was generated, which of course is the income from that previous year.
For example, in 2018, Medicare, after contacting the IRS, will assess a person’s 2017 tax return which will show the income generated during 2016 and then Medicare will make a decision on whether or not that person earned more income than the average amount.
In 2014, the average Medicare income amount is $85,000 for an individual and $170,000 for a couple, but, unfortunately, these income amounts are expected to change by 2016.
According to President Obama’s 2014 Budget proposal as well as a proposal put forth by the Bi-Partisan Policy Center the income amounts are expected to drop to $60,000 for an individual and $90,000 for a couple.
For income, or the amount that will be calculated, Medicare will be and has been using Social Security’s definition of income. Social Security defines income as being “your adjusted gross income plus any tax exempt interest you may have.” This is called your modified adjusted gross income (MAGI), and Medicare will define it that way as well. A simple way for taxpayers to figure out their MAGI is add everything on lines 37 and 8b of the IRS form 1040.
Some examples of what Medicare will deem income: Any wages, Social Security benefits, rental property income, pensions, most capital gains, all dividends (taxable and tax-free), most annuities, traditional IRA’s, and most retirement plans. The income from these sources will be counted against you..
The explanation of why 2016 may have been selected as the year to make these adjustment of lowering the income brackets might just be the fact that 2016 marks the year that the oldest Baby Boomers will reach the age of 70.5, which just so happens to be the same year that these Boomers will be forced to make a withdrawal from any retirement plan they have, due to the required minimum distribution (RMD) rule.
By 2018, there is a distinct probability that a significant amount of retirees will reach these income limits set by the federal government and Medicare. The result may end up being a dramatic drop of their income they will receive from Social Security. Why? Their cost of Medicare will increase and therefore the net Social Security benefit will decrease.
At first, in January of 2018, many may believe that this decrease in benefits was all due to a mistake on the part of Social Security. By February of 2018, when it happens again, the individual or couple will most likely demand an explanation from their local Social Security office.
After contacting Social Security, those impacted will be informed of these rules set up by the federal government, Medicare, the IRS, and Social Security. The next obvious question that might be asked is “When was this rule created?”
Now here is it where it might get a bit sticky for not only the financial industry, but also anyone who has been defined as having a fiduciary responsibility (e.g. employers offering traditional retirement plans). Retirees affected by these higher Medicare premiums (lower Social Security check) will be shocked to learn, from their local Social Security office, that the rules were created back in 2003 – 15 years ago!
The other possible bombshell might also be the realization these retirees, who may be impacted by this will not only see their 2018 Social Security benefits be decreased, but since these rules were not addressed in prior years, that their Social Security benefit in 2019 may also be affected too.
Due to federal regulations that impact retirement, income, Social Security and Medicare, the rules have been changed and what people don’t know about retirement will hurt them, especially when their health is on the line.
In order for retirees to save their Social Security benefits, maintain their tax obligations and control their health costs they must be able to generate that much needed income in a way that is not recognized by both the IRS and also Medicare.
Some of the options that are available today are, in no distinct order:
Roth accounts, certain Life Insurance policies, specific Annuities, 401(h) plans, Health Saving Accounts (HSA’s) and plans that allow them to tap the equity in their primary residencies.
Hopefully this conversation will happen well before 2018.
