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About Dan McGrath

Dan McGrath, is the Director of Healthcare Funding Strategies at HVS Financial. HVS Financial, one of the only firms in the country that has developed unique yet practical software that assists investors and financial professionals in projecting what expected health care costs will be in retirement.
Contact information;
978-539-8134
dmcgrath@hvsfinancial.com

Social Security & Medicare go hand in hand – In order to get one the other must also be taken

September 11, 2012 By Leave a Comment

With a court ruling back in 2011 Social Security & Medicare have become interlocked.

In March of 2011 federal Judge, Rosemary Collyer ruled that in order to receive Social Security a person would also have to enroll in Medicare, if the person refused Medicare for any reason then they would have to forfeit all Social Security benefits too.

This case was under appeal by the Cato Institute a right leaning organization on behalf of three Federal Employee Retirees who not only didn’t want Medicare coverage but actually didn’t need it because of the benefits they were receiving in retirement (the case eventually added two others as well who were not Fed Employee Retirees)

Well, earlier this year the ruling was upheld in a court of law, on Feb. 7, 2012, a federal appeals court ruled in Brian Hall, et al. v. Kathleen Sebelius, et al. that senior citizens who receive Social Security cannot reject their legal rights to Medicare benefits.

This ruling has now single handedly created the one expense that every single retiree will face – Medicare.

And guess what?

Medicare is not free.

Filed Under: Medicare, Retirement

Retirement Income: it is a major factor when determining your health care costs

September 10, 2012 By 1 Comment

The buzz in the financial world is around Retirement and more specifically it is all about Income in Retirement.

There are non-profits built around it, there are broker dealers designed solely to generate it and there are countless professionals from advisors, planners, life agents, CMO’s, wholesalers, back office personnel and authors talking it’s praises but what is the one thing that nobody is even whispering?

That this buzz will eventually be used against you when you retire and enroll into Medicare.

YUP – what everyone is talking about is the biggest factor determining your premiums for Medicare Parts B & D.

With the passing of the Medicare Modernization Act along with the Affordable Care Act new rules have been put into place that allows Medicare to “means test” a beneficiary’s income when it determines a beneficiaries premiums for Medicare Parts B & D and if there is too much there are penalties

For Part B the penalties range from 40% of additional premiums to 220% of additional premiums.

For Part D the penalties range from 35% of the National Standard Premium to 80% of the National Standard Premium.

The minimum amount of income Medicare will allow before a penalty is assessed is $85,000 for an individual and $170,000 for a couple, but please keep in mind that income is defined differently.

Medicare’s definition of income is “the total of your adjusted gross income and tax-exempt interest income you may have. These are the amounts on lines 37 and 8b of IRS form 1040. Some examples of income are: wages, salaries, tips, taxable interest, certain dividends, business income, capital gains, and unemployment compensation, as well as annuities, Social Security payments and some pensions”

Ultimately there are only 3 investment vehicles that do not register on Medicare’s radar

  • Life Insurance – the cash value in the form of a loan
  • Roth IRA/401ks – qualified distributions fly under the radar
  • HSAs

 

Please note that cash withdrawn through a reverse mortgage is also not counted (but the sale of a home can be especially if it’s a vacation home or a primary residency where the capital gains is larger than $250k/$500k).

 

So income is everything else including Tax Exempt income from Muni Bonds and we mean everything.

 

Think this is something that can be blown off?

 

Think again.

 

With health care costs setting a record pace upwards faster than any college could ever dream of those 55 year olds who do plan on retiring at age 65 can expect to incur roughly $302,000 in just Part B & D premiums if they both live to age 85, earn the minimum and reside in Nevada.

 

Keep in mind that this couple hasn’t even used their health coverage yet and plan to never need Dental, Hearing, Vision or routine tests throughout retirement and if they earn just $1 more throughout retirement they will pay;

 

$411,712 for the exact same coverage

 

If their financial professional convinces them to earn the most ($214k for an individual or $428k for a couple) they will pay;

 

$910,577

 

Hopefully no one will be in this bracket throughout retirement, but it can happen to almost any high networth investor who isn’t paying attention. All it will take is the sale of a home for too much, plus a distribution here or there & presto they are paying the max for the year.

 

Think it’s impossible?

 

There is a sales idea brewing out there now for high networth investors to avoid the new 3.8% surtax on investment income over $250,000 and this could lead to disaster for those who take their eye off the ball later in life.

 

The idea is convince these HNW investors to move a portion of their investments into Muni Bonds to avoid the 3.8% surtax and generate income that way.

 

Under the new rules dividends are not included when determining the surtax but they are included when determining your premiums – so please be careful. I’m willing to bet the farm that this little tidbit will be left out of the conversation

 

 

 

Filed Under: Medicare, Retirement

Another look at the $240,000 health care cost in retirement number

August 13, 2012 By Leave a Comment

There has been a lot of talk about Fidelity’s $240,000 healthcare-expense-in-retirement estimation.  I tried to examine it from an unbiased perspective and came to two distinct possibilities:

 

1)      Fidelity has solved the healthcare crisis, or

2)      We need to step back and rethink the number.

 

Let’s look at an example of a 30-year-old working today.  Let’s call him Phil.  Phil Delity.

 

Phil is working for a large company that has provided him with a fair benefits package.  He can expect to pay roughly $215 per month for his premiums, or about 25% of the total, with the employer picking up the remaining 75%.

 

Projecting for the year, Phil will pay a total of $2,580, while his employer will cover the remaining $7,594, so his yearly premium will cost roughly around $10,200.  This seems to be a fairly accurate assessment according to a 2011report from the Houston Business Journal, which used AON Hewitt data to peg total healthcare costs per employee at $10,770 annually, while Milliman pegs a family’s healthcare costs to exceed over $20,000 in 2012.

 

So if Phil stays with the company until he is 50 and incurs approximately $10,000 in healthcare cares costs per year, his total coverage costs should slightly exceed $200,000. (This does NOT take inflation into account.)

 

Still with me?

 

Now Fidelity has led the financial industry to believe that when Phil reaches 65, enrolls in Medicare with his spouse (Phil got married along the way), the two of them should only expect to pay $240,000 for their healthcare for the rest of their lives.

 

Now the question becomes: How does one healthy individual over a 20-year period pay roughly $200,000 for healthcare, but TWO elderly people who live to 80 —with additional variables such as increased medical testing, prescription drug dependency, and long-term care—expect to pay only $40,000 more in costs?  This figure also fails to take into account that Medicare is now means tested, which translates to the “more you earn, the more you pay.”

 

Either Fidelity wants everyone to believe that no one will live that long (so why bother even planning anyway) or they have figured out a way to lower health costs for everyone as they age.

 

I hope that I am not the only one baffled by this.

 

Now if we turn to Healthview Services, an industry leader healthcare cost planning, we will see, by using their revolutionary RetireMark Software, that a couple who is 65 today and only plans to live until age 80 can expect to incur $274,000 in retirement. This number changes drastically if the couple’s income ever exceeds $170,000, they move to a more expensive state, or they live to their actual life expectancy. (88 years for the male and 90 for the female, which will result in approximately $620,000 for their healthcare costs.)

 

Something just doesn’t add up, and unfortunately this misinformation will lead to erroneous planning in which the only real losers will be the clients.

Filed Under: Retirement Tagged With: , , , , , , , , , , ,

Impact of Medicare’s defintion of income on Defined Benefit Plans

August 6, 2012 By 1 Comment

Small business owners who have set up a defined benefit plan for themselves and/or key employees may NOT be helping themselves out at all, especially if it comes in the form of a lump sum at retirement and is not structured inside a life insurance product.

 

Why? You may ask…

 

Medicare is now means tested.

 

Translation?

 

Medicare is now using income in retirement to determine premiums for Parts B & D.   Unfortunately defined benefit plans aren’t looking as attractive as they used to since the income will count against beneficiaries in the eyes of Medicare.

 

For example, a 55-year-old who retires from a credible health plan at age 65, enrolls in Medicare when eligible, plans to live until age 85, and earns under $85k a year in income (as defined by Medicare) can expect to incur over $199,180 in costs to just cover Part B & D premiums – source Healthview Services.

Notice, however, what happens if this person sells a property and jumps into a higher income bracket:

Earnings Basic Healthcare Costs Difference
$85,000 – $107,000 $275, 819 38%
$107,000 – 160,000* $293,738 97%
$160,000-$214,000 $509,436 155%
Over $214,000 $626,483 214%

 

*Once an income bracket is reached, there is significant red tape to revert back to a lower bracket.  Many may remain at the highest level for the rest of their lives—even if total income eclipses a higher bracket for only one year.

 

According to Medicare, there are only five occasions when a bracket can be changed:

  •  You married, divorced, or became widowed;
  • You or your spouse stopped working or reduced your work hours;
  • You or your spouse lost income-producing property due to a disaster or other event beyond your control;
  • You or your spouse experienced a scheduled cessation, termination, or reorganization of an employer’s pension plan; or
  • You or your spouse received a settlement from an employer or former employer because of the employer’s closure, bankruptcy, or reorganization. 

 

Please note that Medicare defines income as the total of your adjusted gross income and tax-exempt interest income you may have. These are the amounts on lines 37 and 8b of IRS from 1040. Some examples of income are: wages, salaries, tips, taxable interest, certain dividends, business income, capital gains, and unemployment compensation, as well as annuities, Social Security payments and some pensions.  This includes all gains and dividends from investments, no matter what they are.  Even municipal bond dividends get added to total income.

 

What isn’t income?  Distributions from Roth IRA’s and cash values inside permanent life insurance policies.

 

Perhaps it’s time to redefine defined benefit plans or those that do receive them must realize that there are more than just taxes to contend with.

Filed Under: Medicare, Retirement Tagged With: , , , , ,

Some of the effects of the Affordable Care Act

July 16, 2012 By Leave a Comment

Now that the ruling has been handed down from the Supreme Court on Obama Care things will be slightly different for those on Medicare and here are just a few facts to keep handy.

Fact 1 – The Closing of the Donut Hole.

To fund the closing of the “Donut Hole” by the Affordable Care Act (ACA) or Obama Care, all Medicare Part D enrollees will have a 25% increase in premiums. Now, instead of only roughly 3 million enrollees being affected by the Donut Hole, the other 24.5 million will pick up the tab to close it – source Milliman

Fact 2 – Medicare Part D Income Adjustments

High Income Earners in retirement will be penalized in the form of higher premiums for Medicare Part D. Their income will be calculated by looking at all monies from any form of wage, pension, Social Security and investment. If they earn too much they will face penalties ranging from 40% to 250% more in premiums – source Medicare.gov

Fact 3 – Patents on medications

Manufacturers of living organism medications will have a new Tier in Medicare Part D, Tier 4. This new Tier allows their patents to be extended indefinitely and they will be able to charge what they want along with allowing health insurance companies to raise the co-pays to 35%. So for those fighting MS who use Betaseron they now get to pay 35% of the annual cost of $33,000 – source AARP

-          By the way, the original cost of being in the Donut Hole would have been cheaper for the user

Fact 4 – Subsidies for Medicare Advantage Plans

The ACA will allow the government to slash subsidies to Medicare Advantage plans which will force insurance firms to increase premiums & cut services. MA Plans were created to give competition to Medicare and the firms that provide this coverage were subsidized to offer it at lower costs. Now, it’s anyone’s guess on what will happen, except the price won’t be lower – source CMS.gov

Filed Under: Medicare

Closing the Donut Hole – 25% to All

July 2, 2012 By 1 Comment

There has been a lot of talk about the closing of the “Donut Hole” in the last year and this mainly due to the new “Patient Protection and Affordable Care Act (PPACA)” which passed in 2010. This one act has effectively closed the drug gap by the year 2020..

This is great news as one of the biggest issues with Medicare Part D is this Donut Hole and on the surface it appears to be solved. But with an action there is always a reaction and let’s look at how all of this plays out.

(For an even bigger issue see our article – “Medicare’s Tier 4“)

What the “Donut Hole” is as defined by www.medicare.gove is “a temporary limit on what the drug plan will cover for drugs. Not everyone will enter the coverage gap. The coverage gap begins after you and your drug plan have spent a certain amount for covered drugs”.

The amount in 2012 that needs to be spent on drugs is $2,930, it includes everything that is spent by the beneficiary and the insurer. Once at this amount the beneficiary is defined as being in the “Donut Hole” and is now responsible for 100% of all drug costs.

There is some relief though, for those that reach the “Donut Hole” they will receive a 50% manufacturer-paid discount on covered brand-name drugs along with a 7% discount on all generic drugs too. They will also receive a $250 rebate just reaching this gap.

While in this gap the beneficiary is own their own until a total of  $4700 is spent. After this amount is spent catastrophic coverage then kicks in and the beneficiary will have a 5% co pay while the insurer picks up the rest of the tab for the remaining part of the year.

Again, this is great news, over the next few years the Donut Hole will go away and beneficiaries will no longer have to worry about this gap in coverage. The new legislation on the books calls for a bigger discounts on drugs for those in this gap until there is no cost to the beneficiary.

Ultimately, the 3.4 million people who reach the Donut Hole each year will no longer have to worry about that large cost by 2020 but here comes some bad news – the other 27.5 million that have some form of Medicare Prescription Drug insurance who never reach the “Donut Hole”,  they will now be stuck paying 25% on all drugs.

Yes, by 2020 the Donut Hole will be closed and it will be replaced with a 25% costs sharing across the board for all brand name & generic drugs – for those that never reached the “Donut Hole” they will now see their overall drug bill increase starting in 2020.

Filed Under: Medicare Tagged With: , , , , ,

States ranking when it comes to healthcare costs in retirement

June 9, 2012 By 5 Comments

Believe or not, where retirees choose to live can greatly impact how much they will pay for healthcare over the long term, especially when it comes to premiums.

Using HVS Financial’s RetireMark Software tools (click here for free trial) we analyzed the data of a 65-year-old couple who are;

  • Healthy
  • Retired as of today
  • Have longevity projections of 85
  • Will earn under $170,000 in income as defined by Medicare throughout retirement.
  • Want to cover premiums for Medicare Part B, Part D, and a MediGap (Plan C) supplemental policy

The cheapest place to live, which came as a shock, is Hawaii ($271,284) and the most expensive (not so much of a shock) is New Jersey ($362,844).

A whopping 33.7% difference exists between the two states.

The determining cost factor among states is simply supply vs. demand. Part B will be a constant for every individual in the U.S. who has paid into the system and whose earnings fall below the Medicare minimum, but Part D and the MediGap Policies are sold by private insurance companies that control prices (with Medicare setting some standards).

So Hawaii, which has a smaller retired population and slightly healthier residents than the rest of the country, will enjoy the lowest healthcare premiums. Conversely New Jersey, with a much larger population (that ostensibly needs extensive healthcare) than Hawaii, is much more expensive because the premiums set by the private insurance companies are higher.

Here is a complete breakdown of how each state stacked up including D.C. and the National Average

Rank State  Costs
1 Hawaii  $ 271,284
2 Vermont  $ 287,754
3 South Dakota  $ 299,714
4 Maine  $ 301,094
5 New Mexico  $ 303,314
6 Montana  $ 304,574
7 North Dakota  $ 307,084
8 Idaho  $ 309,284
9 New Hampshire  $ 313,344
10 Iowa  $ 314,194
11 Washington  $ 315,524
12 Oregon  $ 317,634
13 Minnesota  $ 318,114
14 Wisconsin  $ 319,204
15 Arkansas  $ 319,434
16 Wyoming  $ 320,064
17 Virginia  $ 320,574
18 Nebraska  $ 321,944
19 Rhode Island  $ 322,834
20 South Carolina  $ 323,724
21 Missouri  $ 324,034
22 West Virginia  $ 324,234
23 North Carolina  $ 324,414
24 Georgia  $ 326,664
25 Tennessee  $ 327,684
26 Kentucky  $ 329,534
27 Kansas  $ 331,354
28 Delaware  $ 332,734
29 Washington D.C.  $ 332,914
30 Utah  $ 333,014
31 Indiana  $ 333,464
32 Pennsylvania  $ 334,364
33 Ohio  $ 334,664
34 Colorado  $ 335,294
35 National Average  $ 335,434
36 Connecticut  $ 336,594
37 Alabama  $ 336,844
38 Oklahoma  $ 337,004
39 Mississippi  $ 338,264
40 Arizona  $ 338,364
41 New York  $ 338,624
42 Texas  $ 338,744
43 Illinois  $ 339,814
44 Massachusetts  $ 340,264
45 Louisiana  $ 342,164
46 California  $ 345,224
47 Alaska  $ 348,044
48 Nevada  $ 353,514
49 Michigan  $ 354,474
50 Maryland  $ 355,904
51 Florida  $ 362,544
52 New Jersey  $ 362,844
Filed Under: Healthcare, Retirement Tagged With: , , , , ,

Boomers turning home equity into 401ks – The impact on Medicare premiums could prove costly

May 23, 2012 By Leave a Comment

With the onset of Baby Boomers starting to retire we are beginning to hear  the question from more than a few of them, “why am I paying more for Medicare premiums than others?”

Here is the  article on the subject  from HometownAnnapolis.com.

The answer to this question is Income.

If you make too much of it in retirement you will unfortunately, pay more for your healthcare. Thanks to the Medicare Modernization Act of 2007 & the Affordable Care Act (healthcare reform) it paved the way with new legislation that allows Medicare to charge higher premiums for those that earn “too much” income in retirement.

These two acts also allowed Medicare to define income differently than the IRS. Now, Medicare through Social Security will  add your adjusted gross income together with your tax-exempt interest income to get an amount called the modified adjusted gross income (MAGI).

In layman terms, everything that hits your tax return is now considered income – yes, that is right,  EVERYTHING.

Social Security, wages from work, returns on investments, dividends (even if it’s from a Muni Bond) capital gain payouts, the sale of vacation home, too much return on the sale of a primary residency… EVERYTHING!

With such a broad sweeping issue looming hopefully, enough financial professionals will take notice of this growing concern, adjust their planning accordingly and the problem will be rectified easily but from the latest article from MarketWatch there is room for a lot of worry.

The article titled “Boomers turn home equity into 401k funds” highlights how little is known on Medicare & income.

People who decide to do what is recommended in this article, rip out all their equity from thier home & invest the cash into a 401k vehicle, must realize that when they start to liquidate these monies they will be classified as INCOME.

Is this a problem?

Only if you like paying anywhere from 50% to about 200% more on Medicare premiums so you can “invest” at a tax free rate now of roughly 20%.

As stated previously, Medicare counts everything that hits a tax a return before deductions as INCOME and the penalties are high, which is what Baby Boomers are quickly learning (See article here).

How high can the penalties be?

For a 65 year old who earns under $85,000 throughout retirement and lives to age 85 – they can expect to pay roughly $58,000 in premiums.

If they earn just $1 more over the course of retirement they will pay $80,000

If they earn over $214,000 then they can expect to pay roughly $182,000 FOR THE SAME COVERAGE.

Again, if the financial industry wakes up to this issue it won’t be an issue but from the looks of it a lot of people are going to be in big trouble.

Filed Under: Retirement Tagged With: , , , , , ,

5 Myths of Medicare

May 14, 2012 By Leave a Comment

Myths of Medicare

1)      Myth; Medicare is free 

There is a misconception that Medicare is “free” once a person reaches the magical, worry-free age of 65. While Medicare is subsidized through payroll taxes (the rate is a total of 2.9%of total gross income paid by both employer & employee) there are still plenty of costs connected to the plan.  Unfortunately, not only do subscribers continue to pay as if they are working, they actually can expect to pay even more.

Fact – Medicare has several components; all have which have significant costs attached.  Even Part A, which is labeled as “free,” can have hidden fees, including deductibles, co-pays for service, and possible excess charges.

According to HVS Financial’s unique RetireMark Software—the only tool on the market that allows financial advisors to calculate their client’s health costs on an actuarial basis—an “average” 65-year-old couple retiring at age 65 & living to 90 should expect to incur about $650,000 in Medicare premiums alone.

A 55-year-old couple should expect to incur over $930,000 in costs for their healthcare premiums

 

2)      Myth; Medicare covers all of healthcare needs in retirement.

Fact – With original Medicare, little things like routine physicals in which diagnostic tests are run are NOT covered.

Fact – Medicare will only cover procedures that occur when the beneficiary is admitted as an inpatient to a hospital.  Because of this rule, services like routine dental, vision, hearing, exams, & podiatry are not covered at all; thus, a 65-year old couple can expect to incur over $310,000 in related costs over a 25-year retirement.

 

3)      Myth; Everybody pays the same.

Since the passing of the Affordable Care Act & the Modernization of Medicare Act, Parts B & D are now means-tested. 

Fact – For subscribers, this translates into the more you earn, the more you pay. 

The Medicare definition of income is “the total of your adjusted gross income and tax-exempt interest income you may have.  These are the amounts on lines 37 and 8b of IRS from 1040. Some examples of income are wages, salaries, tips, taxable interest, certain dividends, business income, capital gains, and unemployment compensation, as well as annuities, Social Security payments and some pensions.”

Fact – Not only is what you pay affected by income, but also state of residency.  Where you live may increase your out-of-pocket expenses by as much as 30%! (Keep in mind that Medicare Part D & MediGap plans are sold by private insurance companies that can charge what they want; supply and demand are factors.)

To give you an example from HVS RetireMark software, a 65-year-old couple earning less than the Medicare average, residing in California, will incur $529,000 in costs to cover Medicare Parts B, D, and a MediGap policy.

If they move to Florida, the cost will be $551,000.

If they move to Hawaii, the cost will be $415,000.

 

4)      Myth; There is a choice when it comes to Medicare.

The only choice comes if you purchase a Medicare Advantage Plan. These are constructed and sold by private insurance companies and they must meet the guidelines of Medicare. (They are also subsidized by Medicare, too.)

Fact – with the passing of the Affordable Care Act (ObamaCare) it has been ruled that a person receiving Social Security Benefits MUST also enroll into Medicare when they become eligible.

 

5)      Myth; Currently there is no way to calculate what these healthcare costs will be.

Fact – HVS Financial has designed a unique yet practical software platform that assists financial professionals in projecting their clients’ health care costs in retirement.

HVS RetireMark software was designed by financial professionals who have lived through these expenses firsthand. The company has partnered with the country’s leading actuarial firm and a board of medical physicians to provide much-needed healthcare-cost information to the financial services industry.      

Filed Under: Medicare Tagged With: , , , , , , , , ,

Medicare Advantage Plan Subsidies by State over $1.3 Trillion Paid Out

May 12, 2012 By 2 Comments

One of the lesser known facts in the world of healthcare in retirement is that Medicare Advantage Plans are subsidized by the government and that the amount is for some staggering.

When the onion is peeled back it can be seen that for every 5 star Advantage Plan sold in the Bronx in New York the private health insurance company will receive $1,114.57 a month as a subsidy from the government

For every 5 star plan sold in Jackson, MS the firm receives $970.25 a month

The most expensive, Miami – Dade at $1,346.58 a month

The total expected to be paid out in 2012 – $1.3 Trillion.

To see the Medicare Advantage Monthly Capitation Rates for 2012 please click here

The subsidies are meant to keep rates low and benefits high but with over 70 million people heading to Medicare in the next 15 years how are we going to keep this up?


		

		
Filed Under: Medicare  

	

	
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