Sunday, July 27, 2014

So just what are the costs for Medicare?

















In my previous post I promised that I would dive more into this.  The figures and tables contain public information, but I must disclose that my colleague and mentor, Dan McGrath, assisted me in assembling them so they are easy to read in a blog post.  Dan is one of the founders of Jester Financial (www.jesterfinancial.com).


Let’s take a few moments to review what Medicare is about.  I purposely left out Medicare Advantage plans because the PPACA (Obamacare) guts the funding.  We are also hearing anecdotal reports of doctors opting out of accepting the plans. 


Medicare Part A:  This is the part that many refer to as the free part or the hospital coverage.  It’s only free because you paid into it.  The qualifications is the same as Social Security – 40 quarters.  If you don’t qualify, there’s a cost.  This is important because some unions and municipalities did not participate in Medicare and Social Security.  That’s a topic for another time.


Medicare Part B – This is what many call the doctor portion.  It is currently $104.90 per month or $1,258.80 per year, per person.  This is the standard rate before surcharges, which are based on income, are added on.


Medicare Part D -  This is the prescription drug portion.  According to a reputable site, www.Q1medicare.com, the average monthly amount per person is $53.26 or $639.12 per year.  This coverage is also based on income, but it adds a few more variables such as your age, gender, and residency.


Supplemental Coverage (Medigap Plans) -  This is the insurance that helps cover deductibles, co-pays, and other out of pocket expenses Medicare doesn’t cover.  It is $181 per month on average for a Plan F policy, per person or $2,172 per year (source: Weiss Ratings).


So if you add it all up, the total cost for Medicare coverage per person in 2014 is $4,069.92. This uses average figures using the national average.  If you want a more detailed calculation, Jester Financial has a free software tool at www.yourretirementcosts.org.   


Where it gets scary


Medicare has two problems.  No, I’m not going to use the scare tactics from the pundits and politicians who tell you the system is going broke.  I am going to look the issues using data. First, we all know that health costs is running are inflating rapidly.  Take a look at the advices from your insurance company.  It is believed that healthcare inflation is at least twice as high the average rate of inflation.  Second,  the premiums for Medicare Parts B & D are also based on income.


So if you look at inflation and assume a 20 year retirement for a 65 year old person retiring today, this is what the total costs for Medicare premiums alone might be:





But wait, there’s more


If we go back and look at 47 years worth of data for Medicare Part B premiums, we will discover that Medicare Part B has been inflating at approximately 7.856% annually.  This data is from Medicare.


We cannot be that precise with Medicare Part D because the program is newer, but we can take a look at what the Medicare Board of Trustees is predicting.  The board believes, as of 2012, Part D will inflate by 7.1% for the next 8 years.  Well, as I type we are 2 years into that already.


Medigap Plans  are sold by private insurers, so we have to see what data the Department of Health and Human Services (HHS) has.  The agency reported that for the last 20 years these policies have been inflating between 4% to 6%.  This is expected to continue, and it could get worse.


If you are age 65 now and think you’ll make it to age 85, you should expect to pay at least $182,597 for just Medicare premiums.


Let’s double the offer


Although I really shouldn’t joke,  Here’s where it gets serious. Since 2007, Medicare has been means testing premiums through it Initial Retirement Monthly Adjustment Amount (IRMAA) that assesses an added surcharge on top of the current Part B & D premiums for those that have too much income in retirement.


Currently, the income brackets are courtesy of www.Medicare.gov.  (Hat Tip to Dan for formatting it for me)


http://m.c.lnkd.licdn.com/mpr/mpr/p/3/005/071/1f7/23902fc.jpg


How the IRMAA will impact a retiree in 2014:


http://m.c.lnkd.licdn.com/mpr/mpr/p/3/005/071/1f7/347d641.jpg


Look what happens if  retirees that happen to earn $1 too much in retirement (over the base amount).  You may say, eh what’s the big deal?  So someone paid an extra $649.20.  Ah, we forgot about inflation.  Look at the numbers over a 20 year period:


http://m.c.lnkd.licdn.com/mpr/mpr/p/3/005/071/1f8/00dc60c.jpg


I’m wealthy… who cares?  Here’s what the numbers look like at the highest bracket:http://m.c.lnkd.licdn.com/mpr/mpr/p/3/005/071/1f8/2f41dab.jpg


 


Let’s go for the special onetime offer available only for the next 100 callers


There are some proposal out there to increase the means testing, that is get the “rich” to pay more.  Who is behind this?  The House Ways and Means Committee, President Obama in his 2014 Fiscal Budget, and the Bi-Partisan Policy Center.  If they get their way, this is what 2017 might look like. 


http://m.c.lnkd.licdn.com/mpr/mpr/p/4/005/071/1f8/21ef3e7.jpg


Notice something interesting?  For Medicare premiums, two singles living together can ‘shield’ more income from Medicare than a married couple.


Who is helping you plan for this?  Are they just helping you plan for Social Security?  If they are just focusing on Social Security,  Medicare is deducted from there.  So if Medicare premiums continue to rise, how is your financial plan going to handle a possible loss of Social Security? How are you going to feel when you realize it is all due to one mandatory cost you never planned for and probably your advisors never factored in to your plan?

Next post will go into how one can plan for and solve this problem.

Again, a special thank you for Dan McGrath of Jester Financial for helping with some data and chart formatting.


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Robert (Rob) Klein is an independent advisor in White Plains. He’s a leading expert in managing and controlling healthcare expenses in retirement. Rob helps ensure that individuals receive the Social Security retirement income they entitled to receive, while hopefully helping them lower their income tax obligation in retirement.


You may reach Rob at (914) 461-3341 and connect with him on LinkedIn at www.linkedin.com/in/advisorrob/






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