Retirement Planning

Will Your Money Last? Risks to Retirement Income

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In brief:

  • A sound retirement income plan takes into account several financial risks including the potential for the retiree to outlive his or her assets and the effects of inflation on future income.
  • Other considerations include rising living and healthcare costs, as well as taking excess withdrawals from your retirement account and uncertainty about the future of Social Security benefits.
  • The overall objective of planning should be to create a sustainable stream of income that also has the potential to increase over time.


With so much at stake when planning a retirement income stream, it pays to take a step back and see whether your plan takes into account the major obstacles to retirement income adequacy. When you take this big-picture view, there are two major challenges that most retirees face:

  • Longevity risk: the possibility that you will outlive your savings. We’re living longer, healthier lives.
  • Investment risk: the possibility that an actual return on investment will be lower than your expected return.

There are other important considerations that can impact your long-term financial security too, including factors like rising living and healthcare costs, as well as uncertainty about the future of Social Security benefits. Understanding and addressing each of these challenges can lead to more confident retirement preparation.


Longevity risk

While most people look forward to living a long life, they also want to make sure their longevity is supported by a comfortable financial cushion. As the average life span has steadily lengthened due to advances in medicine and sanitation, the chance of prematurely depleting one's retirement assets has become a matter of great concern.

Consider a few numbers: According to the latest government data, average life expectancy in the United States climbed to 77.9 years for a child born in 2007, compared to 47.3 years in 1900. But most people don't live an average number of years. In reality, there's a 50 percent chance that at least one spouse of a healthy couple aged 65 will reach age 89 (see table below).1
 

Perspectives on Longevity
 

Chance of Living to a Specific Age

50%         25%

Male aged 65:                        age 83      age 88

Female aged 65:                     age 86      age 90

50% chance at least one of a 65-year-old couple will reach age 89.
Source: Social Security Administration, Period Life Table, 2007.

>> Related: Use the Social Security Administration's life expectancy calculator to estimate your longevity.


Investment Risk

The decision about how much money may be safely withdrawn each year from a retirement nest egg needs to take into consideration all the risks mentioned above. But retirees also must consider the fluctuating returns that their personal savings and investments are likely to produce over time, as well as the overall health of the financial markets and the economy during their withdrawal period.

The stock market's collapse in 2008, after a short bull market run following the Tech Bubble, illustrates the dangers of withdrawing too much too soon. Investors have short memories and often forget that the market was down 50% from it's high in March 2009. Withdrawing 7 percent or even more per year from a retirement portfolio during the bull market years might have seemed a reasonable rate. But the ensuing bear market in stocks raised the possibility that the value of a retiree's portfolio might be reduced as a result of stock market losses, increasing the chance that the retiree would outlive his assets.

According to one analysis, the average maximum sustainable withdrawal rate over any 30-year period for a balanced portfolio of stocks and bonds was 6.3 percent after adjusting for inflation. One strategy that may potentially avoid premature exhaustion of assets is to adopt a relatively conservative withdrawal rate of 4 percent a year. The same study showed that a withdrawal rate of 4 percent was sustainable in 95 percent of the periods studied.2
 

Inflation and cost of living

The increase in the price of certain items varies over time as well as from region to region and according to personal lifestyle. Through many ups and downs, U.S. consumer annual inflation has averaged about 3 percent since 1926. If inflation were to continue increasing at a 3 percent annual rate, a dollar would be worth only 54 cents in just 20 years. Conversely, the price of an automobile that costs $23,000 today would rise to more than $41,000 within two decades.

For retirees who no longer fund their living expenses out of wages, inflation affects retirement planning in two ways:

  • It increases the future cost of goods and services, and
  • it potentially erodes the value of assets set aside to meet those costs -- if those assets earn less than the rate of inflation.
     

Healthcare costs

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The cost of medical care has emerged as a more important element of retirement planning in recent years. That's primarily due to three reasons:

  • Healthcare expenses have increased at a faster pace than the overall inflation rate.
  • Many employers have reduced or eliminated medical coverage for retired employees.
  • Life expectancy has lengthened.

In addition, the nation's aging population has placed a heavier burden on Medicare, the federal medical insurance program for those aged 65 and older, in turn forcing Medicare recipients to contribute more toward their benefits and to purchase supplemental insurance policies.

The Employee Benefit Research Institute has estimated that if recent trends continue, a typical retiree who is age 65 now and lives to age 90 will need to allocate about $180,000 of his or her nest egg just for medical costs, including premiums for Medicare and "Medigap" insurance to supplement Medicare. Because of the higher cost trends affecting private health insurance, the same retiree relying on insurance coverage from a former employer may need to allot nearly $300,000 to pay health insurance and Medicare premiums, as well as out-of pocket medical bills.
>> Related: CWM White paperRetiree Healthcare: What Will It Cost You?


Future of Social Security

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The demographic forces that have led to an increasingly older population are expected to continue, putting more pressure on the financial resources of the Social Security system -- the government safety net that currently provides more than half of the income for six out of 10 Americans aged 65 or older. This isn’t a pressing issue at the current time, but with ongoing discussions about how to revamp Social Security to keep it solvent for longer, it is wise to consider Social Security maximization strategies in your retirement planning.
 

Addressing these risks

While the risks discussed above are common to most people, their impact on retirement income varies from person to person. Before you can develop a realistic plan aimed at providing a sustainable stream of income for your retirement, you will have to relate each risk to your unique situation. For example, if you are in good health and intend to retire in your mid-60s, you may want to plan for a retirement lasting 30 years or longer. And when you estimate the effects of inflation, you may decide that after you retire you should continue to invest a portion of your assets in investments with the potential to outpace inflation.

Developing a realistic plan to address the financial risks you face in retirement may seem beyond you. But you don't have to go it alone. At Cambridge Wealth Management, we offer an array of financial planning and investment services. So no matter where you are in life – whatever complexities you may face – our experienced advisors are equipped to help you find clarity and guide you along the most effective path towards achieving your retirement plan goals.

 

Source/Disclaimer:
1. Source: Social Security Administration, Period Life Table, 2007 (latest available).
2. Source: DST Systems, Inc. This example is a compilation of all 30-calendar-year holding periods from 1926 to 2015, based on a portfolio of 60% U.S. stocks and 40% long-term U.S. government bonds, with annual withdrawals adjusted for actual historical changes in the Consumer Price Index. The example is not intended as investment advice. Actual sustainable withdrawal rates ranged from 3.7% to 11.4% in the periods studied. Please consult a financial advisor if you have questions about choosing a withdrawal rate and how it relates to your own financial situation.

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

Investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. The information contained in this piece is intended for information only, is not a recommendation and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances. Cambridge Wealth Management reorganized parts of the introduction, middle, and closing paragraphs, added the clickable links, and the chart titled "Retirement costs soar for Uncle Sam." All data are driven from publicly available information and has not been independently verified by Cambridge Wealth Management, LLC. Certain statements contained within are forward-looking statements including, but not limited to, predictions or indications of future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.

Tax Strategies for Retirees

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In Brief:

Managing taxes in retirement can be complex. Thoughtful planning may help reduce the tax burden for you and your heirs.

  • Consider the tax implications of different investments—such as municipal bonds and index funds—and maintain a portfolio that fully utilizes the range of tax-efficient strategies available.
     
  • Rethink how you allocate investments to—and make withdrawals from—taxable and tax-deferred accounts. Tax-deferred investments have greater earning potential than their taxable counterparts due to compounding, yet withdrawals from tax-deferred accounts are subject to higher taxes than investments held for a year or more in taxable accounts.
     
  • You will need to work out a comprehensive estate and gifting plan with competent professionals so you can make the most of your money while you are alive and maximize what you pass on to heirs.
Nothing in life is certain except death and taxes.
— Benjamin Franklin

That saying still rings true roughly 300 years after the former statesman coined it. Yet, by formulating a tax-efficient investment and distribution strategy, retirees may keep more of their hard-earned assets for themselves and their heirs. Here are a few suggestions for effective money management during your later years.
 

Less Taxing Investments

Municipal bonds, or "munis" have long been appreciated by retirees seeking a haven from taxes and stock market volatility. In general, the interest paid on municipal bonds is exempt from federal taxes and sometimes state and local taxes as well (see table).1 The higher your tax bracket, the more you may benefit from investing in munis.

Also, consider investing in tax-managed mutual funds. Managers of these funds pursue tax efficiency by employing a number of strategies. For instance, they might limit the number of times they trade investments within a fund or sell securities at a loss to offset portfolio gains. Equity index funds may also be more tax-efficient than actively managed stock funds due to a potentially lower investment turnover rate.

It's also important to review which types of securities are held in taxable versus tax-deferred accounts. Why? Because the maximum federal tax rate on some dividend-producing investments and long-term capital gains is 20%.* In light of this, many financial experts recommend keeping real estate investment trusts (REITs), high-yield bonds, and high-turnover stock mutual funds in tax-deferred accounts. Low-turnover stock funds, municipal bonds, and growth or value stocks may be more appropriate for taxable accounts.
 

The Tax-exempt advantage: when less may yield more


Would a tax-free bond be a better investment for you than a taxable bond? Compare the yields to see. For instance, if you were in the 25% federal tax bracket, a taxable bond would need to earn a yield of 6.67% to equal a 5% tax-exempt municipal bond yield.
Federal Tax Rate 15% 25% 28% 33% 35% 39.6%
Tax-Exempt Rate Taxable-Equivalent Yield
4% 4.71% 5.33% 5.56% 5.97% 6.15% 6.62%
5% 5.88% 6.67% 6.94% 7.46% 7.69% 8.28%
6% 7.06% 8% 8.33% 8.96% 9.23% 9.93%
7% 8.24% 9.33% 9.72% 10.45% 10.77% 11.59%
8% 9.41% 10.67% 11.11% 11.94% 12.31% 13.25%
The yields shown above are for illustrative purposes only and are not intended to reflect the actual yields of any investment.


Which Securities to Tap First?

Another major decision facing retirees is when to liquidate various types of assets. The advantage of holding on to tax-deferred investments is that they compound on a before-tax basis and therefore have greater earning potential than their taxable counterparts.

On the other hand, you'll need to consider that qualified withdrawals from tax-deferred investments are taxed at ordinary federal income tax rates of up to 39.6%, while distributions—in the form of capital gains or dividends—from investments in taxable accounts are taxed at a maximum 20%.* (Capital gains on investments held for less than a year are taxed at regular income tax rates.)
 

The Ins and Outs of RMDs

The IRS mandates that you begin taking an annual RMD from traditional IRAs and employer-sponsored retirement plans after you reach age 70½. The premise behind the RMD rule is simple—the longer you are expected to live, the less the IRS requires you to withdraw (and pay taxes on) each year.

RMDs are now based on a uniform table, which takes into consideration the participant's and beneficiary's lifetimes, based on the participant's age. Failure to take the RMD can result in a tax penalty equal to 50% of the required amount. TIP: If you'll be pushed into a higher tax bracket at age 70½ due to the RMD rule, it may pay to begin taking withdrawals during your sixties.
 

Estate Planning and Gifting

There are various ways to make the tax payments on your assets easier for heirs to handle. Careful selection of beneficiaries of your money accounts is one example. If you do not name a beneficiary, your assets could end up in probate, and your beneficiaries could be taking distributions faster than they expected. In most cases, spousal beneficiaries are ideal, because they have several options that aren't available to other beneficiaries, including the marital deduction for the federal estate tax.

Also, consider transferring assets into an irrevocable trust if you're close to the threshold for owing estate taxes. In 2017, the federal estate tax applies to all estate assets over $5.49 million. Assets in an irrevocable trust are passed on free of estate taxes, saving heirs thousands of dollars. TIP: If you plan on moving assets from tax-deferred accounts, do so before you reach age 70½, when RMDs must begin.

Finally, if you have a taxable estate, you can give up to $14,000 per individual ($28,000 per married couple) each year to anyone tax free. Also, consider making gifts to children over age 14, as dividends may be taxed—or gains tapped—at much lower tax rates than those that apply to adults. TIP: Some people choose to transfer appreciated securities to custodial accounts (UTMAs and UGMAs) to help save for a grandchild's higher education expenses

Strategies for making the most of your money and reducing taxes are complex. Your best recourse? Plan ahead and consider meeting with a competent tax advisor, an estate attorney, and a financial professional to help you sort through your options.

Source/Disclaimer:

1. Capital gains from municipal bonds are taxable and interest income may be subject to the alternative minimum tax.
2. Withdrawals prior to age 591/2 are generally subject to a 10% additional tax.
* Income from investment assets may be subject to an additional 3.8% Medicare tax, applicable to single-filer taxpayers with a modified adjusted gross income of over $200,000 and $250,000 for joint filers.

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content. Cambridge Wealth Management updated the federal estate tax exemption. © 2016 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

Investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. The information contained in this piece is intended for information only, is not a recommendation and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances. All data are driven from publicly available information and has not been independently verified by Cambridge Wealth Management, LLC. Certain statements contained within are forward-looking statements including, but not limited to, predictions or indications of future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.

Should you convert to a Roth IRA?

In Brief:

Investors at any level of income can convert assets from a traditional IRA to a Roth IRA. This article explains the potential benefits and tax implications of a conversion.

There are several key differences between a traditional IRA and a Roth IRA that can impact your wallet. So, are there benefits to converting all or a portion of your traditional IRA assets into a Roth? The answer to this query likely depends on:

  • The amount of time you plan to leave the assets invested,
  • Your estate planning strategies, and
  • Your willingness to pay the federal income tax bill that a conversion is likely to trigger.
     

Two Types of IRAs

Each type of IRA has its own specific rules and potential benefits. These differences are summarized in the table below.

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Conversion: Potential Benefits ...

Potential benefits of converting from a traditional IRA to a Roth IRA include:

  • A larger sum to bequeath to heirs. Since lifetime RMDs are not required for Roth IRAs, investors who do not need to take withdrawals may leave the money invested as long as they choose which may result in a larger balance for heirs.
     
  • Additional planning consideration – estate taxes: State estate taxes do not provide an IRD deduction (income in respect of decedent). Therefore, estate tax savings must be balanced against future income tax rates for you and your heirs. In short, estate tax benefits are greater at the state level, and only relevant at the Federal level for IRA-centric estates. Note: After an account owner's death, beneficiaries must take required minimum distributions, although different rules apply to spouses and non spouses.
     
  • Tax-free withdrawals. Even if retirees need withdrawals for living expenses, withdrawals are tax free for those who are age 59½ or older and who have had the money invested for five years or more.
     

... As Well as a Potential Drawback

  • Taxes upon conversion. Investors who convert proceeds from a traditional IRA to a Roth IRA are required to pay income taxes at the time of conversion on investment earnings and any contributions that qualified for a tax deduction. If you have a nondeductible traditional IRA (i.e., your contributions did not qualify for a tax deduction because your income was not within the parameters established by the IRS), investment earnings will be taxed but the amount of your contributions will not.
     
  • The conversion will not trigger the 10% additional tax for early withdrawals.
     

Which Is Right for You?

If you have a traditional IRA and are considering converting to a Roth IRA, here are a few factors to consider:

  • A conversion may be more attractive the further you are from retirement. The longer your earnings can remain invested, the more time you have to help compensate for the associated tax bill. Pay the tax when your tax rate is anticipated to be the lowest.
     
  • Tax equivalency principle: Your current and future tax brackets will affect which IRA is best for you. If you expect to be in a lower tax bracket during retirement, sticking with a traditional IRA could be the best option because your RMDs during retirement will be taxed at a correspondingly lower rate than amounts converted today. On the other hand, if you anticipate being in a higher tax bracket, the ability to take tax-free distributions from a Roth IRA could be an attractive benefit.

There is no easy answer to the question "Should I convert my traditional IRA assets to a Roth IRA?" As with any major financial decision, careful consultation with your financial advisor and accountant is a good idea before you make your choice.

 

Source/Disclaimer:

1. IRA account holders (both traditional and Roth) may avoid the 10% additional federal tax on withdrawals before age 59½ only if they meet specific criteria established by the IRS. See Publication 590-A for more information.

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content. Cambridge Wealth Management rewrote parts of the introduction, closing paragraph, and added the section titled "Additional planning consideration – estate taxes," and the term "tax equivalency principle." © 2016 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

Investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. The information contained in this piece is intended for information only, is not a recommendation and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances. All data are driven from publicly available information and has not been independently verified by Cambridge Wealth Management, LLC. Certain statements contained within are forward-looking statements including, but not limited to, predictions or indications of future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.

Planning for Retirement - Explore what's possible

 CWM's newly redesigned retirement section

CWM's newly redesigned retirement section

Happiness is when what you think, what you say, and what you do are in harmony.
— Mahatma Ghandi

Achieving your dream of a secure, comfortable retirement takes proper planning and commitment. Today's retirees are faced with, among others, two key risks:

Investment risk: the possibility that an actual return on investment will be lower than your expected return.
Longevity risk: the probability that you will outlive your savings. We’re living longer, healthier lives and will spend more time in retirement than our parents did.

 

Our approach provides you with the guidance you need to add clarity to your financial future. Partnering with you and best-in-class experts, we bring together all the facets of your financial life, ensuring that the four cornerstones of a smart wealth management strategy — asset management, estate planning, retirement planning, and tax planning — are working in harmony so you can get the most out of your retirement life.
 

Some of the important retirement questions we can help you answer are:
 


Am I investing properly for a comfortable retirement?

Determining a proper asset allocation is critical and it should reflect the goals you are trying to attain as well as your tolerance for risk. With access to more than 12,000 investment options, the flexibility of an open architecture platform allows us to build an extraordinarily competitive investment portfolio for both growth and protection.
 

What will happen to my assets upon my death?

You want to create a lasting legacy for the people and causes that you care about. With smart, holistic planning, we can help ensure that your wealth passes as you want it to and a significant portion doesn't end up in the hands of unintended heirs or go to the government.
 

Will I have enough money to live my ideal retirement life?

Retirement planning has two phases: accumulation and actual retirement. During the accumulation phase, we help clients in setting goals and implementing financial strategies to achieve them. Our retired clients rely on our ongoing expert advice so they can continue to enjoy the lifestyle they’ve earned.

Social Security maximization strategies: There are many combinations of Social Security claiming strategies and rules on benefits are complex. We can help you avoid making a filing mistake that could end up costing you thousands of dollars annually for the rest of your retirement life.
 

 How can I minimize taxes on my retirement income?

Taxes can generally be one of your larger expenses in retirement. We help you take advantage of tax avoidance strategies by reviewing your tax returns and implementing smart, tax efficient strategies, such as placing higher-yielding taxable assets in tax-deferred IRA accounts.

    The better we understand you, the better advice we can give
     

    First, we'll have a conversation about your most important priorities, the values that inspire you, and uncover your vision for retirement. 

    Next, we'll agree on the areas that you would like us to review. We'll gather your financial data, analyze your current position, and design your retirement plan.

    Lastly, we will suggest strategic recommendations and provide guided implementation of your plan. With our ongoing monitoring, we're always there for you to adjust your strategy when your personal situation changes or the markets shift. Learn more >>


    Find Clarity with a Cambridge Wealth plan

     SCHEDULE YOUR FREE CONSULTATION >


    Retiree Healthcare: What will it cost you?

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    I’ve been thinking about our healthcare problem and how to pay for healthcare….If we took all the money Republicans have spent trying to stop healthcare reform and all the money Democrats have spent trying to get healthcare reform, we all could afford healthcare.
    — Jay Leno

    I first learned about the complexities and limitations of Medicare when I was 30 years of age due to a family tragedy. On September 22, 1994, my father was diagnosed with pancreatic cancer. He passed away a few months later on December 11, just prior to his 62nd birthday. I contacted our family financial advisor, a Certified Financial Planner (CFP®), and asked her what I should do regarding my mother’s healthcare insurance coverage. She replied:  “Just sign her up for a Medigap plan with Blue Cross of New York; your mother qualifies for Medicare under a widow’s benefit.”— that was it! 

    When I became a CFP® in 2007, I discovered that my mother and I had received poor financial guidance after my father’s death. Needless to say, it upset me, and that’s why I’m writing today about this subject. I never want any of you to go through what I went through due to my lack of understanding of Medicare healthcare choices, poor advice, and blind trust. More on this subject in the coming months in a case study post devoted to Social Security and Medicare strategies (SSA link) for the surviving spouse. It can be very complicated, as I will illustrate, especially for grieving widows or widowers. In my mother’s case, like many women of her generation, she never wrote a check or selected her healthcare plan. Complicating matters further was the fact that my mother is Japanese, and English is her second language.
     

    The Medicare Supplemental Plan Maze

    In January 1995, I found the Medicare coverage options very confusing, and I had no idea what a Medigap plan would cost my mother. It took weeks of research in my spare time to find the answers I needed, and to get my mother appropriate coverage (at least what I thought was appropriate) -- a supplemental plan that overcame the limitations of Medicare.  

    Now, 20 years later, even with great Internet resources, people are still confused about the coverage they need once they're eligible for Medicare. And the costs have skyrocketed -- I have seen my mother’s Medigap plan cost rise over 10% annually on average over the past 20 years. My mother is now nearly 82 and, thankfully, very healthy. I have modified her original Medigap plan over the past 20 years a few times in an effort to keep costs under control. Her current plan is Plan N (one of many letters used by Medicare to categorize Medigap plans). Her plan premiums just went up again in 2015 to $548.64 per quarter from $497.28, and in 2013, it was $429.83 quarterly --- that’s a 15% year-over-year increase!

    Click here (www.medicare.gov) and type:  “A quick look at Medicare” in the search field, upper right [or scroll down] for a quick primer on Medicare coverage choices.
     

    A Startling Statistic

    According to a recent Nationwide Insurance survey, 4 out of 5 people approaching retirement said they could not estimate how much they expect to pay for healthcare in retirement.1 That’s not a surprise; insurance coverage options remain maddeningly complex, and costs have been rising at more than twice the rate of inflation, averaging 6.9% annually since 1960.2  Adding to retiree anxiety are ongoing changes to our national healthcare coverage -- the Affordable Care Act. 


    So how much will healthcare really cost you in retirement?  Here's a rough idea:
    Fidelity’s annual Retiree Health Care Costs Estimate suggests that a 65-year-old couple retiring in 2014 would need $220,000 in total to pay for medical expenses throughout their retirement.  (This is assuming the husband lives to 82 and the wife lives to 85.)  If a husband and wife live to 92 and 94, respectively, the cost estimate grows to $335,000.3 This estimate does not account for the cost of a long-term care facility.

    That quarter-million figure is an essential part of the calculus when you're setting up your retirement plan, and it’s often overlooked. However, it's just an average estimate and this figure will vary depending on your health. For a look at Medicare costs-at-a-glance, click here.


    Fortunately, there are three concrete steps you can take to ease your mind and your retirement budget. These steps are:

    1.  Discovery

    Understand your health-related needs based on your history and current health. Research insurance plans that fit your needs.
     

    2.  Planning

    Take the information from your discovery work and develop a written plan that factors healthcare costs into your retirement income planning.
     

    3.  Implementation

    Be a smart healthcare consumer. It's vitally important to get informed, and above all, stay proactive about choosing your healthcare providers.



    1. Discovery:  Understand your health insurance options

    If current trends continue, in just a few years, healthcare will likely be your second largest expense in retirement, more than food.  

    Medicare is a key part of the equation because it's typically the primary source of health coverage for retirees. However, Medicare only covers about half of your healthcare costs. That means that it's up to you to be able to fund the other half. But before you can assess how to do that, it's important to understand what I like to call the A, B, C, and Ds of Medicare.
     

    Medicare Part A – Hospital Insurance
    Helps pay for inpatient hospital care, limited coverage in a skilled nursing facility, and full coverage for eligible home health care and hospice care.

    This is the original, basic Medicare coverage, first introduced in 1965. Most people automatically qualify for Hospital Insurance, also known as Medicare Part A, as soon as they reach age 65. It's important to note that the 1983 Social Security Amendments included provisions to raise the full retirement age (FRA) beginning with people born after 1938. If your were born between 1943 - 1954, your FRA is 66. And for those who were born after 1960, FRA moves to age 67. 

    Since you paid into it through Medicare taxes during your working years, it doesn’t cost you anything.

    There is a brief window—three months before you turn 65, the month you turn 65, and three months after you turn 65, for a total of seven months—to enroll in Medicare. This is referred to as the Initial Enrollment Period. 
     

    Medicare Part B – Medical Insurance
    Helps pay for  physicians' services, outpatient hospital services, durable
    medical equipment, and other services like physical therapy.

    Medicare Part B is a different story. It’s not free. You pay a monthly premium for it that's based on your Modified Adjusted Gross Income (MAGI), and your Social Security income is reduced by your Part B premium.
     


    2015 Medicare Part B premiums based on income

    Your Annual Income                                                             2015 Premium

    Individual Tax Return             Joint Tax Return                          You Pay

    $85,000 or less                           $170,000 or less                             $104.90

    $85,001 up to $107,000           $170,001 up to $214,000              $146.90

    $107,001 up to $160,000         $214,001 up to $320,000              $209.80

    $160,001 up to $214,000         $320,001 up to $428,000             $272.70

    Over $214,000                            Over $428,000                               $335.70
     


    Part B Late Enrollment Penalty (clickable)
    If you miss this window, your Medicare medical insurance (Part B) and prescription drug coverage (Part D) may cost you more as you can incur penalties. Simply put, if you do not sign up for Part B when first eligible, "your monthly premium for Part B may go up 10% for each full 12-month period that you could have had Part B, but didn't sign up for it," states the Medicare Part B enrollment rules.

    While the late enrollment penalty can be very costly for you, a gap in coverage can be financially devastating since there’s no limit on out-of-pocket expenses. This is where private insurance comes into play. Remember, Medicare only covers about half of your healthcare costs.

    There are two routes to adding health insurance to basic Medicare:

    • Unbundled - Medigap plans or,
    • Bundled - Medicare Advantage plans

    Medigap policies may be the best choice for people who want to keep their original Medicare Part A & B but want more choice in providers. As the term suggests, Medigap policies fill in coverage gaps. You can choose any doctor or facility you like, but there is a higher premium for this privilege. Because they are unbundled, Medigap policies do not cover prescription drug coverage. You still will need to purchase prescription drug coverage, Medicare Part D, with a Medigap plan.
     

    Medicare Part C – Medicare Advantage plans

    Medicare Advantage Plans, also known as Managed Care Plans, are bundled plans. They are designed for people who want an “all-in-one” plan that's similar to an HMO. To enroll in a Part C plan, you need to already have Part A & Part B coverage in place. These plans often include prescription drug plans (Medicare Part D).

    Medicare Advantage plans are popular with seniors and were introduced in 2003 as part of the Medicare Modernization Act of 2003; enrollees now represent about 30% of all Medicare beneficiaries.  


    Medicare Part D – Prescription Drug Plans

    While Part C bundled plans commonly offer prescription drug coverage, insurers sell Part D plans separately to those who have Medigap plans or original Medicare. As per Medigap and Part C coverage, you need to keep paying Part B premiums in addition to the premiums for the prescription drug plan you choose in order to keep Part D coverage.

    There are many private insurance options available. Although it can be time- consuming to select supplemental coverage, it can make a big difference in your $$ outlay. The good news is that the government’s Medicare site, www.medicare.gov, provides tools that make objective and straightforward coverage comparisons. Once you’re in the Medicare site, select “Find health & drug plans.” The site is user-friendly and can help you compare plans in your state that offer the best value for your unique health-related needs.

    It’s important to ask the tough questions to insurers, as well, on how you can keep costs down.  

    More advice can come from your county's State Health Insurance Assistance Program (SHIP) office at no cost to you. Find your closest one by visiting www.eldercare.gov and typing in your zip code. I was very impressed with the help I received from the Rensselaer County SHIP office when I shopped for new Part D drug plans for my mother in November 2012.
     


    2. Retirement Income Planning: Factor in your healthcare costs

    Once you have an idea on the cost of a supplemental plan that best suits your needs, you can model in healthcare spending along with your other retirement expenses. This is an important step often overlooked by financial professionals.

    Make sure you factor the appropriate costs and inflation rates into your retirement plan. Healthcare spending is expected to grow at 5.8% annually through 2022.4  Inflation rates for healthcare coverage also vary based on your health. For example, someone with type 2 diabetes could have an inflation rate of 10% annually vs. the 5.8% average. So it’s possible to get a fairly accurate present value of your future healthcare costs.
     


    3. Implementation: Be a smart healthcare consumer

    We research cars, electronics, vacation resorts, and countless other retail items prior to purchase, but for some strange reason, we don't conduct the same due diligence for our healthcare needs. It's vitally important to get informed, and above all, stay proactive about choosing your healthcare providers. There's a huge disparity in prices, which means smart decisions can save you a lot of money. 

    If you identify the best providers for safe and cost-effective solutions before care is needed, you can save a significant amount of time and money later. Start with knowing the types of providers to turn to in different situations:

    •    Primary care physicians
    •    A specialist for any existing conditions or special needs
    •    An urgent care provider
    •    A full-service hospital

    Take the case of someone who breaks his arm. An emergency room visit could run $2,000 or more, while an urgent care facility might cost $250-500 for the very same care.  

    This brings up another point, especially when you travel during retirement, whether on vacation or to visit friends and family. If you have a Medicare Advantage Part C plan, it doesn’t travel with you, since you're restricted to using in-network providers.

    There is some progress being made to partner with out-of-state/out-of-network providers. But for now, if you get sick or injured when you're away from home, you'll have to pay out-of-pocket for the full tab unless you purchase a travel policy.

    Bottom line: Do your research before you go on vacation, because it can get very expensive quickly if you don't.   

    Wherever you are, if you do fall ill, don't hesitate to ask questions about treatment options, because they will have wildly varying costs. If you're facing surgery, for example, investigate whether an outpatient procedure could be a safe, effective, and lower-cost alternative to traditional in-patient surgery. An additional note: carry a copy of your healthcare proxy in your car's glove box or upload it to a secure file in the cloud.

    Remember that if you’re paying a larger portion of costs yourself with a high-deductible plan, these decisions have an immediate effect on your healthcare budget. 

    Also very important: Know what the charges, fees, and out-of-pocket costs you should expect for the recommended treatment plan before you authorize treatment. Healthcare facilities are "for profit" institutions and you shouldn’t be surprised by the cost of your care when you receive your healthcare bill!

    Prescriptions also can cost thousands of dollars a year. Don’t assume you’re getting the best price with your plan’s distributor. Costs can vary, and there usually are lower-cost generic brands.  (The www.medicare.gov website can help you in this area of comparison.)5  Also know that healthcare costs can vary widely based on geographical region. That may be an important factor in deciding where to retire. Regional costs comparisons can be found on the Centers for Medicare and Medicaid Services website.6

    As stated earlier, if current trends continue, healthcare will likely be your second largest expense in retirement. Therefore, covering healthcare expenses is an essential part of retirement income planning. As life expectancies continue to increase, the money set aside for healthcare costs will have to last longer. In a recent Fidelity survey, 9 in 10 people approaching retirement said they were worried about outliving their savings due to the effect of inflation and the cost of medical care.7  By taking the time now to plan for your retirement healthcare expenses, you'll likely have the confidence and peace of mind to manage healthcare costs in retirement.
     

    For more information on resources or an analysis of your healthcare budget based on your personal health needs, please contact our office at info@cwllc.com or 518.677.3781.

    Footnotes:

    1.  Nationwide Survey “Health Care Costs in Retirement.” Consumer study of 801 respondents, 2013.

    2.  Centers for Medicare & Medicaid Services, National Health Expenditures; Aggregate and Per Capita Amounts, Selected Calendar Years, 1960 -2011.

    3.  Fidelity Investments, “How to tame retiree health costs," May 2013.

    4.  “National Health Expenditure Projections, 2012-22: Slow Growth Until Coverage Expands And Economy Improves.” Health Affairs, September 2013.

    5.  The Patient Protection and Affordable Care Act requires pharmaceutical companies to offer a 50% discount on brand-name drugs that fall into the so-call “donut hole.”

    6.  Centers for Medicare & Medicaid Services: Total All Payers Per Capita State Estimates by State of Residence 2013, and State Health Expenditure Accounts by Residence Location Highlights, http://www.cms.gov. Percentages were calculated by Fidelity.

    7.  Fidelity Advisor 2013 Survey of Investors at Retirement, July 2013. Conducted by Research Now on behalf of Fidelity Investments, this survey included 1,886 investors between the ages of 50 and 75 with investable assets of $100,000 or more.  Fidelity Investments was not identified as the survey’s sponsor.

    Pre-retirement Anxiety

    Cultivate your intuition to improve your decision making.
    — Herbie Hancock

    On February 23rd, I had a second meeting with a couple nearing retirement. One spouse, whom I will call Sarah, is retiring the end of April. I first met with Sarah and her husband on December 29th, 2014. It was another brutally cold February evening. We were finally meeting again after two major snowstorms had postponed our second meeting. We began our initial meeting on December 29 by talking about Sarah’s retirement concerns.

     #1 CONCERN:  You may have guessed it already…Sarah is retiring at age 62 and will not have a steady paycheck for the first time in a long time. She's concerned about being able to maintain her standard of living. In fact, the uncertainty and anxiety are keeping Sarah up at night lately.

    GOAL:  Create a steady paycheck at 70 - 80% of her current net salary.
    Sarah and her husband agreed to a financial planning engagement after our initial meeting that included an analysis of their budget, liabilities, Sarah’s retirement income plan, and their investment portfolio. Her husband, whom I will call Bob, is retiring in 2017 at age 64. Bob has a six-figure income, and when he retires, he will earn about 75% of his final pay. Bob is one of the few retirees today who has a guaranteed pension that includes health care coverage. Besides a few small student loans from their son and daughter’s education, they only have $35,000 remaining on their mortgage. 

    So, you might be asking, what’s the issue? Change of any kind is unsettling, and retirement is a major change. Sarah simply has a case of pre-retirement anxiety.  It’s well founded in reality as she’s unsure about:
    •    Which pension option out of five choices to take — she has small defined benefit plan, 
    •    ESOP options, 
    •   401k options — where, how, and if to roll over the balance,
    •   Social Security — Sarah filed for Social Security in November to have some form of an income,
    •   Student loans from her son and daughter’s college education are still being paid off — Sarah is concerned about adequate cash-flow.

    SOLUTION:  At the core of Sarah’s anxiety, like many pre-retirees is fear…the fear of making the wrong decisions with all the above options and not having a steady paycheck. Like many couples, Sarah and Bob have been too busy with life to address Sarah’s retirement planning needs. Fear, as we know, stems from a lack of knowledge, confidence, and trust. Sarah and Bob have worked with a few advisors over the years. However, their advisors were not Certified Financial Planners nor interested in completing a formal “cash flow-based” financial plan.

    I analyzed their budget and learned that $700 of their $1,200 monthly student loan payment would be paid off in two months. The remaining student loan balance at an 8% APR is only $8,000. After analyzing their current investment portfolio, I suggested rebalancing in line with Sarah's current risk profile and retirement income goal. Next, I suggested selling a Rochester NY municipal bond holding (a great time to sell) to pay off the remaining student loan balance, solving an immediate retirement cash-flow concern. Further, the muni bond sale will generate minimal capital gains. We addressed all of the above bullet points and created five actionable steps for Sarah's pre-retirement meeting with her company HR department. I also suggested consolidating existing IRA's and other investment accounts with Cambridge to implement Sarah's immediate retirement income plan. Sarah and Bob agreed with my recommendations — they have accounts in many different places. I will be setting up a monthly EFT into Sarah's bank account from an existing annuity and one of her smaller IRAs (another tax-advantaged strategy). Sarah's perceived need to generate 70% of her income is no longer necessary as $1,200 of debt payments will be paid off over the next 60 days. In fact, once the EFT plan and her defined benefit plan payment are implemented, Sarah can immediately suspend her Social Security payment.
     
    At the end of our meeting, Sarah smiled and looked as if a huge burden had just been lifted from her life. She said, “I've been worrying about my retirement income — I should be able to sleep much better now.” I had helped Sarah cure her pre-retirement anxiety by defining a clear, practical retirement income strategy.

    Please stop by again shortly; I will share with you the solution I designed for Sarah and Bob’s Social Security strategy…it will surprise many of you!

    Welcome...

    I have just three things to teach: simplicity, patience, compassion. These three are your greatest treasures.
    — Lao Tzu

    Thank you for taking the time to visit our site today. We will always begin a post with a favorite quote. This week's quote embodies some of the core values of Cambridge's business model.  

    In the future, we will be posting financial life management case studies and tips. We will also share our market thoughts and strategy under our "Insights" tab. As time goes on, we will build out an interactive resource center at this location.

    We promise that the content presented will be relevant, devoid of industry jargon, and educational. It's our goal that we can encourage, educate, and thereby empower you to take action in your financial life with our posts.

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