Peter Stahl: When I tell advisors, it’s really critical to build some sources of tax-free wealth, I mean it.
Ben Jones: Welcome to Better conversations. Better outcomes. presented by BMO Global Asset Management. I’m Ben Jones.
Emily Larsen: And I’m Emily Larsen. On this show, we explore the world of wealth advising from every angle, providing actionable ideas, designed to improve outcomes for advisors and their clients.
Disclosure: The views expressed here are those of the participants and not those of BMO Global Asset Management, it’s affiliates or subsidiaries.
Ben Jones: A couple of years ago, I had the opportunity to help my mother figure out her retirement health insurance also known as Medicare. Now we did this with the help of a qualified expert, but it turns out that navigating Medicare options is not as straightforward as it seems. Today, we’re going to break Medicare down and learn a thing or two from returning guests, Peter Stahl of Bedrock Business Results.
Emily Larsen: Peter last joined the podcast on Episode 64, to talk about health savings accounts. Today, we’ll actually touch on that topic again, as part of a larger conversation about planning for retirement with means-testing and taxable income in mind. But to begin, let’s start with the basics of Medicare and why it should matter to you and your clients.
Ben Jones: How do you describe Medicare?
Peter Stahl: Medicare simply put, is government run, retirement health insurance.
Ben Jones: And it kind of resembles, I guess it’s the closest thing we have the United States to single-payer healthcare systems, which exist in other parts of the world, or what was proposed back by the Obama administration is Medicare for all. But sometimes people confuse the difference between Medicare and Medicaid. And so what do you think is the biggest misunderstood thing about Medicare?
Peter Stahl: I would say really the enormous amount of taxation required to offer Medicare in its current form.
Ben Jones: And is that number growing or decreasing with the baby boomer population? Maybe you don’t know off the top of your head.
Peter Stahl: Oh, no, it is growing both with the number of enrollees with our aging population continuing to grow, the costs continue to grow. And really Medicare has been expanding, particularly during the COVID environment. We’ve seen the number of items that are covered by Medicare increase. And now there’s even some chatter in the current administration’s budget about some major expansions, so that the trend is to make it bigger and broader, not to pare it back.
Ben Jones: Interesting. And so for financial advisors, why is this topic so important?
Peter Stahl: Really, I would say two things Ben. One, it is healthcare one of the largest expenditures clients will have over the course of their retirement years. And that’s largely driven by Medicare costs. I would put it as maybe number two behind taxes in terms of what you will spend your retirement income on. So if you’re a financial advisor and helping people certainly accumulate wealth, but also put together a retirement income and wealth preservation plans, you have to know what the largest expenditures are and how to best plan for those. So that’s point number one. And then secondly, the advice that financial advisors offer during those peak accumulation years, the fifties, the sixties, early seventies, right before you retire, can have a direct impact on Medicare costs. And a lot of advisors don’t realize that. So they need to, in some cases, adjust the day in and day out advice that they’re giving people in those key preparation years.
Ben Jones: I’m not sure that I even was aware of that, Peter, and just showing my ignorance here on the topic. Tell me a little bit more about that.
Peter Stahl: Well, Medicare is means-tested, at least portions of it are, specifically as it relates to your income, your taxable income during retirement and so building sources of wealth that can be pulled out in retirement on a tax-free basis can lower your Medicare costs. So in other words, if you have a lot of taxable income flowing at you throughout retirement, and that taxable income is even growing through retirement, that means it could be and most likely will be driving you into higher Medicare premiums, so higher and higher costs for that health insurance. Whereas if you’ve connected with your client and started to have them build a couple of sources of tax-free wealth. Now, when you get to that retirement income planning, you’ve got some levers to pull where you can generate cashflow for the client without driving up federal taxes, state taxes, and Medicare taxes.
Ben Jones: There is a real and tangible tie between your tax and wealth planning and your client’s Medicare premiums. Now the next section, we’re going to really get into the weeds with some differences between Medicare coverage models. It’s a lot to keep track of and we’ll do our best to sum it up here at the end. Maybe we could just start with kind of explaining the parts of Medicare, because there are a number of different programs and options, et cetera. So maybe you could talk first a little bit about kind of like is Medicare primary or secondary coverage and maybe walk through some of the parts.
Peter Stahl: Sure. So Medicare is primary coverage for most retirees. When you look at Medicare, there is really two essential pieces to what is called original Medicare, A and B. Original Medicare is what is offered through the federal government. It is mandatory and Part A gets into hospital coverage, skilled care, which is like a rehab facility, hospice care, those type of issues. Part B gets into physician coverage, outpatient surgery, even preventative care, like a flu shot or a COVID vaccine. So you have A and B that’s original Medicare, and there’s really two basic coverage models because there are substantial holes or gaps if you will, in that coverage, most people will go out and add a Medicare supplement policy. There are eight standardized plans across the country for these Medicare supplement policies and they have letters. The most robust coverage for someone retiring right now is offered through the letter G used to be letter F. Now it’s letter G. So original Medicare, A and B through the federal government and then a Medicare supplement policy, as well as a prescription drug policy. Those four pieces constitute probably the most popular coverage model that there is for Medicare. And then there is a second choice in which you still enroll in original Medicare A and B, but it’s kind of behind the scenes because you get your package bundled up by what’s called an Advantage Plan – Medicare advantage. And that is where a private insurance company bundles up could be an HMO or PPO. There’s all sorts of shapes and sizes, but what they do is they give you a regional network. And those are two important words, regional network of physicians, and also typically bundle up your prescription drug coverage. And that’s how you get your Medicare is through the Advantage Plan. And it’s either, or either you take original Medicare with the supplement in the drug plan, or you go with the Advantage Plan where it’s all bundled up together.
Emily Larsen: Let’s break that down one more time. There are two models of Medicare coverage and your clients choose one or the other. The first coverage model is the most popular form of Medicare. It consists of original Medicare Parts A and B that you get through the federal government. The other two pieces are a Medicare supplement policy, also known as Medigap and a prescription drug policy Part D. So that’s A, B, Medigap and D. For Medigap, Peter notes the most robust supplement policy is the letter G. So think A, B, G, and D, that’s some alphabet soup. In the second coverage model you get Medicare Parts A and B bundled up in the advantage plan from a private insurance company. That Advantage Plan is Part C and includes both prescription drug coverage and a regional network of physicians. So that’s A, B and C.
Ben Jones: Let’s talk just a little bit more about these Advantage Plans. I asked Peter about the pros and cons of choosing an Advantage plan over the traditional coverage model. So let’s talk a little bit about Medicare Advantage in moving into kind of that B model. Why was the need for these plans brought about, and what are some of the pros and cons relative to kind of the traditional coverage model A, which is the ABC and the Medigap coverage.
Peter Stahl: Medicare Advantage Plans, really, I guess the idea is to provide some level of alternatives and choice within the retirement healthcare space. And so you have private insurance companies, even though it’s a highly regulated environment because they have to offer you all the coverage levels that you’d get with your original Medicare A and B, but it does allow them to at least try to innovate a little bit in terms of how they’re going to offer that coverage in what it’s going to look like. And even how to expand it, maybe into some areas such as a gym membership to keep you healthy or some vision and dental coverage that you wouldn’t get with just original Medicare. So the Advanced Plans do allow a little bit of innovation in that area. The biggest fork in the road that needs to be considered is most of the Advantage Plans are tied to a regional network of physicians. And about a third of our country goes the Advantage Plan route. And I would say are generally satisfied. However, that’s a big decision to make and to consider because Ben, if you think about it, you retire and you’re feeling good, feeling healthy, but 10, 15 years in you’re sitting with the doctor and they say, we’ve got a major problem. And I would recommend you go to the Cleveland Heart Institute or the Sloan Cancer Center or the Mayo Clinic in Minnesota. And then now all of a sudden, if your health insurance is in an Advantage Plan with a regional network of physicians, you’re going out of network. And that gets a lot more expensive if you go out of the network. So if you are willing to get your care starting, when you enroll all the way through, until you pass away from that regional network of physicians, then the Advantage Plan can work quite nicely for you. But a lot of people want the flexibility of knowing that they can see any specialist in the country who takes Medicare and 95% plus of our physicians except Medicare. They want that peace of mind, knowing at any point when something comes up, I will be able to go and get my care.
Emily Larsen: According to Peter, these Medicare Advantage Plans can save you somewhere around 25, 35 or even 40%, but it depends on how much you use your healthcare. If you’re a high consumer of healthcare, it actually tends to even out. One other thing to keep in mind is when clients should sign up for Medicare. They become eligible at age 65, but is that always the best time?
Ben Jones: Let’s talk a little bit about the strategies for signing up for Medicare. When is the appropriate time for someone to sign up and when’s the appropriate time for advisors to start engaging their clients in these discussions around, like you mentioned, the means-testing.
Peter Stahl: Right. Advisers should contact their clients and be proactive as their clients approach age 65, because they will start to get bombarded with information on Medicare. However, it’s important to realize that they may not want or need to sign up for Medicare at age 65. The way it kind of breaks down is if you have group health insurance, or maybe even your spouse’s employer, as long as that company is 20 or more employees, and that coverage is as robust as Medicare, which most of the big group plans are going to be, including the prescription drug coverage and hospital doctor, all the coverages you get with your group plan, then you can stay right on that group plan all the way until you retire. And at that point, step off of the group plan and onto Medicare. So that may not have anything to do with age 65 that may be age 66, age 72 age 70. I mean, people are working longer and longer, right? So I think it’s important for advisors to reach out and contact clients as they approach age 65 to figure out is this your time? Because the flip side of that Ben is if your coverage is provided by a company smaller than 20 employees, welcome to Medicare, right? You need to get on during what’s called that initial enrollment period when you turn age 65. So Medicare is your primary insurance like it or not at that point. So you absolutely want to get on, or you will be late and have late enrollment penalties when you try to do it later.
Ben Jones: That’s a really important point, particularly for people who work for small businesses, which employ a lot of people across the country. And I’m curious, should somebody miss that window tell me a little bit about how the penalties for delaying enrollment work.
Peter Stahl: Yeah. The penalties most specifically relate to your Part B coverage and your prescription drug coverage and the way they work is for every year that you’re late for your Part B it’s a 10% penalty. So a 10% increase in the premium.
Ben Jones: Wow.
Peter Stahl: Wow is right. Because it’s cumulative. So if you’re two years late, it’s 20%. If you’re five years late, it’s 50% and it’s for the rest of your life. So as long as you’re on Medicare, you’ll be paying that penalty. Part D is 1% for every month that you’re late and that’s also cumulative. So you’re three years late. You’re 36% penalty on your Part D so you want to get that right. You don’t want to be late.
Ben Jones: Yeah. That’s a really important point for people to be on top of. Now, I’m curious, because there are, as you mentioned, a lot of people that are working well into their seventies these days, and you hear more and more about people saying they want to be engaged in kind of work that they love into their eighties. And so I’m curious what kind of potential planning conversations need to take place here, both with advisers, as well as those employees with their employers to make sure that they get these decisions right.
Peter Stahl: Yeah. I mean, the first thing is a very simple conversation with your employee benefits person. So you’ve got a company it’s 20 or more employees you’re on a group plan. Or once again, it’s coming through your spouse. You want to verify with your employee benefits person, that this is what they call creditable insurance coverage, which means it’s working as extensively as Medicare, including the prescription drug coverage. And that’s an easy conversation for an employee benefits person to answer. Yes, absolutely. You can stay on this plan all the way until you retire. So you just want to verify, the second thing you want to consider is Medicare Part A for most people does not have any type of premium associated with it because you have that tax that you’ve been paying, you see that on your pay stub, every pay period, right? So that primarily goes to fund Part A. So you get to retirement. A lot of people say, “Well, part A is free. Why don’t I just take that?” Well, that might be a prudent strategy. But as you mentioned, when I was on your broadcast a couple of years ago, we were talking about health savings accounts. Well, once you enroll in Medicare, you can no longer contribute to a health savings account. And if that’s what you’re doing, you may want to delay Medicare in its entirety, your Part A and your Part B so that you can continue to fund your health savings account. Now, the only other thing I would throw in there is once you start your social security retirement benefit, you are automatically enrolled in Medicare Part A. So you can decline B at that point, but you’re in A, which means you’re on Medicare. So if you really want to defer Medicare in its entirety, you will need to defer your social security retirement benefit as well.
Ben Jones: Oh, very interesting. A lot of people are deferring social security these days, particularly if they were born before a certain year. But I’m curious as we see different solutions for social security proposed, do you think that the Medicare will follow those social security delays or age limits, or will it be a totally separate piece of legislation?
Peter Stahl: It will be separate. In fact, the trend seems to be a divergence. Social security is getting pushed out to later and later. And it’s kind of interesting people recognize, listen, social security is on the road to insolvency. One of the solutions is to push out the age. Well, Medicare more so was on the road to insolvency. And yet we have a proposal by President Biden’s budget that just came out, wanting to take the Medicare age from 65 down to 60. So you’ve got social security being pushed out to older ages and proposals that we should let people get on Medicare at an earlier age.
Ben Jones: One important and often overlooked element of this conversation is a specific form called the SSA-44. Yes, very fancy, I know. Now I’ve heard Peter speak about this form before, and this is a really important topic. So I asked him to please explain the form.
Peter Stahl: Medicare is means-tested as I mentioned, they look at your income level to determine your Part B and your Part D premium. And they look at your income from two years back. So think about a retiree in 2021, you can pick any year you like. Well, let’s say 2021. Well, they’re looking at 2019 and thinking, oftentimes that was the peak of my career, right? That was right at the end of my career. One of the highest incomes I ever earned, you’re telling me that’s the income that Medicare is going to look at to determine, my premium, my first year premium here in Medicare. And the thought is often, “Well, why not look at my current retiree income, which is often lower, at least at the start of retirement and base the Medicare premiums on that.” And the good news is this form SSA-44 allows you to instruct Medicare, to look at your current income rather than your income from two years ago. And a lot of people just flat out don’t even know that’s an option. I think the two year look back is a non-negotiable. When actually you can instruct Medicare to look at your current income, as long as you’ve had what Medicare calls a life-changing event. Now, the good news is a full retirement or a partial retirement called a partial or full work stoppage by Medicare constitutes a life changing event. So if you’re fully retired or partially retired and that’s caused a drop in income, you can let Medicare know it’s all done through the social security office and potentially save thousands of dollars on those first-year Medicare premiums.
Ben Jones: Boy, that is a great tip. And it’s SSA-44, did I get that right?
Peter Stahl: You got it right.
Ben Jones: And I got to say, like I mentioned, having gone through this with my, with my mother and now her retirement income, right? Current income does differ from earned income. And it seems like it could be a very big impact for people who are able to guide their clients to using this approach. Now we touched on this briefly, but I know you touched on it as well when we talked last time on Episode 64. But when you think about ways to put tax-free income away, HSAs are a great tool. And I’m curious, you mentioned that if you’re on Medicare, you can’t fund an HSA, but do you also have to have earned income? How does that work?
Peter Stahl: The HSA you can contribute to as long as you have the right type of health insurance. So it’s not age driven, it’s not earned income driven. It’s purely driven by do you have HSA compatible insurance? So it’s a high deductible plan that actually has to meet a number of stipulations in order to be able to offer an HSA. So let’s call it HSA insurance. As long as you have one of these high deductible HSA insurance plans, you can contribute to that HSA all the way up until you enroll in Medicare. So that’s really the distinguishing factor in terms of looking at HSA eligibility. Once you get on Medicare, even though you can no longer contribute to the HSA, you can still use your HSA by all means you can withdraw from it. So hopefully you’ve accumulated wealth in that. And I mean, if you’re paying five grand a year in Medicare premiums, by the time you retire, you can take five grand out of your HSA tax-free.
Ben Jones: And that doesn’t count against your means-testing. Right?
Peter Stahl: Exactly. So that’s the concept is you accumulate wealth in things like an HSA or a Roth. And then when you pull that income out in retirement, it’s not going to drive you into a higher Medicare bracket.
Emily Larsen: Retirement healthcare insurance can be a tricky area to navigate. There are options with different trade-offs and some potential pitfalls. So it’s crucial that you are well versed in the subject or have access to an expert like Peter. At a minimum, you should know the difference between those two coverage models of Medicare, the traditional, and the Advantage Plans, when clients can and should defer Medicare and the penalties for not doing so correctly. And don’t forget about that SSA-44 form.
Ben Jones: We want to thank Peter for another great conversation filled with lots of actionable advice. Please take a look at our show notes page, where we’ll have links to Peter’s online resources, as well as his book and Q&A. Now, before we close out, Peter has one more excellent point. So get your pencil out and prepare to take notes. I’m curious, Peter, we’ve known each other a while, so I know you’ll shoot me straight here. What is the question that I should’ve asked you that I didn’t?
Peter Stahl: Oh boy, one area we just really need to play out here a little bit is the fact that Medicare premiums come out of your social security retirement benefit. So increasing Medicare premiums have a very tangible effect on your retirement income. Picture the financial advisor with a client who has accumulated most of their wealth in pre-tax income. Haven’t done the HSA, haven’t done the Roth and they start those required minimum distributions. And over the course of their life, age 80, age 85, age 90, age 95, that those RMDs get enormous and they can completely tank your social security retirement benefit. I mean, just imagine that conversation where you’re sitting down with a client who is 85, 90 years old, trying to explain how a $20,000 a year social security benefit is now sitting at $12,000. So when I tell advisors, it’s really critical to build some sources of tax-free wealth in the HSA, in the Roth, I mean it. I mean it really has a very tangible impact on your client’s livelihood during retirement.
Ben Jones: Thank you for listening to Better conversations. Better outcomes. This podcast is presented by BMO Global Asset Management. To access the resources discussed in today’s show please visit us at www.bmogam.com/betterconversations.
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Ben Jones – Put them in the parking lot.
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