How to Find the Best Medicare Plan

Hey Paul: I will turn 65 next year and will start Medicare for my health insurance. I am confused on the how to choose among the different plans including prescription drug coverage. What do I need to know?

 Medicare can be relatively straight-forward for most people but you do have some choices that can make a big difference in your out-of-pocket medical expenses as well as choice of medical providers. I’ve compiled a list of the most important terminology, plan selection process, and cost estimates. Fortunately the State and senior groups have excellent support services. So here’s the core knowledge you should arm yourself with as you go into the Medicare maze:

  • Medicare is public health insurance for essentially all Americans 65+. If you (or your spouse) paid Medicare taxes for a decade then you are eligible for Medicare upon reaching age 65.
  • Medicare also covers Social Security Disability recipients after two years of disability and those with kidney failure (ESRD).
  • A related but separate program is Medicaid that provides public health insurance for “the poor”. A household must be below the 100% to 138% (depending on the state) of poverty level to be eligible for Medicaid.
  • The Elderly can be on both Medicare and Medicaid if they are poor. Even a middle-class individual or couple can qualify for Medicaid once they run their assets down to essentially zero; Medicaid is a major payer for Nursing home care.
  • Obamacare is essentially an extension of Medicaid up to 400% of the poverty level. Higher income households receive smaller subsidies in purchasing insurance on the insurance exchange.
  • You may also be eligible for other health care plans: employer (current benefit, COBRA or retiree benefit), Union plan, VA (vets) or TRICARE (military). Typically these are supplements to Medicare adding benefits such as vision or dental or perhaps paying towards Medicare premiums or copays. If you work past age 65 and have group health coverage then it pays first and Medicare may (or may not) cover what is left over on your medical bills.

What medical services does Medicare cover? If you have employer-provided health coverage than you’ll find Medicare is very similar. Doctor visits are usually 80% covered by Medicare leaving 20% for you to pay. The first day in the hospital will cost you a $1288 deductible but then Medicare covers the cost for 60 days.

Medicare covers many other services – an ambulance to get you to the hospital, skilled nursing care as you recover from the hospital and hospice if you won’t be recovering. All these services fall under what are called Part A (Hospital) and Part B (Physician Services). Everyone with Medicare will have Part A as it premium free. Essentially everyone would also have Part B although it requires a monthly premium of $104.90 for most seniors (very high retirement incomes will roughly triple the premium).

So what isn’t covered by Medicare’s Part A and B? Let’s start with the easiest one and that’s prescription drug coverage. Fortunately Medicare Part D plans can be purchased for around $35 a month that will offset much of your prescription costs. You’ve probably heard of the infamous “doughnut hole” where coverage is very limited. Obamacare is reducing the self-expense in the hole but it still very much exists. See https://www.medicare.gov/Pubs/pdf/11493.pdf for all the delicious details.

A second set of items that Medicare doesn’t cover are the various deductibles, coinsurance and copays. You could reasonably pay these as they occur or you could purchase a Medigap (supplemental insurance) that covers the $1288 hospital deductible or 20% physician services or the odd charge for the first 3 pints of blood. There are 10 standardized plans known by their letters. Plans F and N are the most popular with consumers. Plan F is comprehensive covering essentially all out-of-pocket Medicare expenses while N covers the major ones and usually has a lower premium.

A third set of medical expenses lie outside of Medicare. The most foreboding is long-term care (nursing home). Other potential expenses include dental, vision, hearing, and cosmetic surgery. You have three choices here: pay out-of-pocket and pray to the Lord for a one-hoss shay demise, purchase private insurance or explore Medicare Advantage Plans that I’ll discuss in the next section.

The majority of seniors enroll in traditional Medicare (Parts A & B). Then you have the option to add Part D (Rx) &/or Medigap (supplemental insurance). You can also opt for the all-in-one package, Medicare Advantage plans (Part C). In a nutshell MA plans are Parts A, B, D and Medigap all rolled into one. You pay the Part B premium but generally pay less then if you bought separate Part D and Medigap plans. A further bonus is that MA plans throw in some health goodies – vision, dental, hearing, maybe even a gym membership!

Why doesn’t everyone go with these cheaper, better plans? Well they may be neither cheaper nor better. Unlike piecing together Parts A and B and then customizing Part D and Medigap to fit your expected needs, you have a one-size-fits-all plan that may have among other things rather skimpy Rx benefits. The other big downside of MA plans are that you are limited to a network of local doctors and hospitals much like an HMO.

Ok, so when and where do I sign-up? You have a seven-month window around your 65th birthday month to complete the original sign-up. You almost certainly want to sign up for Medicare including Part D during this period. If you don’t have a good excuse (like continuing employer coverage) you’ll be hit with a late penalty once you do apply and could be subject to medical exams and review. Medicare.gov is the first place to go to learn more and to enroll once you’ve chosen your plans. You can review Medicare Advantage, Part D and Medigap plans. For assistance you can contact Medicare, the AARP or the KY Cabinet for Health and Family Services.

For those who are already on Medicare and think they are on auto-pilot, think again.

Medicare Advantage plans, Part D and Medigap plans can have shifting premiums and revised coverage particularly in Part D formularies (what drugs are covered). Each year from October 15 until December 7 you can review and change plans to best fit your health needs at the lowest cost. An annual review could save you $100’s. It’s worth a look each year!

Dr. Paul Hamilton, CFP is currently offering a comprehensive planning session that will cover your specific situation in Social Security, Taxes, Retirement, and Estate Planning. The one-time fee of $500 is guaranteed to return savings, confidence and peace-of-mind. Contact him at Paul.Hamilton@USA-Economics.com or 502-405-8125 to discuss your situation.

 

Teachers Get Dinged on Social Security

Hey Paul: I have taught in the local school system for 30 years. I plan to retire in a few years and my teacher’s pension will be about $36,000. I also managed a tutoring business for 10 years and paid social security taxes out of those paychecks. My Social Security statement projects my age 66 benefit to be $500 a month. How will my teacher’s pension impact my social security benefit?

 Teachers like yourself and other state workers generally do not pay social security taxes so they don’t receive full social security benefits. To the extent that they also worked in employment covered by social security as you have they will receive partial social security benefits.

There are two gotchas the SSA applies to those who did not pay into the social security system on all their employment. The first is called the Windfall Elimination Provision (WEP) and means that the reported value of $500 of your own benefit in your SS statement is likely going to be much lower in reality. As a rough rule-of-thumb expect about half in social security from what is stated on the SSA report.

The reasoning behind this reduction is that your limited number of years (10 in your case) in SS covered employment with a modest salary gives the impression that you are a low-income earner. Of course in reality you also had a good teaching salary in addition to the tutoring income.

The SS retirement benefit is based on a three-tiered formula in which the first $856 of averaged monthly earnings is replaced at 90%. The second tier drops down to 32% for earnings between $856 and $5157 and then is only 15% on higher earnings. That is low income workers get almost all of their working years’ income replaced by SS benefits. Middle-class and high-income earners get a larger SS check but at a progressively lower rate.

Accounting for your teachers’ pension makes you “middle-class” so the WEP reduces the first benefit bracket from 90% to 40%. I applied this lower rate to your situation and your own SS benefit will be about $222 a month rather than the reported $500 due to WEP. Sorry to be the bearer of bad news.

There are a several caveats and exceptions to WEP but most don’t apply to new retirees. One exception is that your SS can’t be reduced by more than half your pension. This applies primarily to those with very modest pensions. In your case SS will be reduced by about $278 that is much less than half your monthly pension of $1500.

Another WEP exception is that you can bump up the 40% rate by 5% for each year above 20 years that you have “substantial earnings”. If you have 30 plus years of substantial earnings you are no longer WEP’d! In 2016 substantial earnings was defined by the SSA as $22,050. In your case you only had 10 years that may have qualified as substantial earnings so you are stuck with the WEP 40% rate.

For those who serve as life-long teachers with little or no SS covered employment the WEP doesn’t come into play as you need at least 10 years of work to be eligible for your own social security benefit. But suppose you have a spouse (or ex-spouse you were married to for 10 years). Can you receive a SS spousal benefit approximately equal to half their retirement benefit or can you receive a SS widow benefit equal to their full retirement benefit if you survive your spouse?

No, sorry that’s not going to happen. The Government Pension Offset (GPO) reduces any spousal or widow benefit by two-thirds of your pension. Since your monthly pension is $3000, two-thirds of this or $2000 will be offset on any spousal or widow benefits. Since the maximum SS own benefit this year is about $2600 the maximum spousal benefit is $1300. So you definitely won’t be receiving a spousal benefit. If your spouse dies then your widow benefit would be sharply reduced by $2000. For anyone like yourself with a good pension, don’t count on much if any SS spousal or widow benefits.

Is there anything you can do to avoid or diminish the impact of the WEP and GPO? Yes, here are a couple of things to keep in mind. First, the WEP and GPO are triggered by the actual receipt of your teacher’s pension. If you can start your own SS or spousal benefit at 62 (or widow benefit as early as age 60) before you start your pension then these adjustments do not apply. Once you do start your pension they will likely wipe out any SS benefits but perhaps you can get a few years in of un-dinged SS benefits.

If you are married then it typically is a good idea to select a joint-life annuity rather than single life annuity. This provides longevity insurance at the cost of a smaller benefit check. However the smaller pension would reduce the GPO penalty on spousal and widow benefits. I wouldn’t make the annuity payment type based solely on trying to skirt the GPO but it is another reason to consider a joint payout.

The SSA has two-page briefs on the WEP and GPO (https://www.ssa.gov/pubs/EN-05-10045.pdf and https://www.ssa.gov/pubs/EN-05-10007.pdf) that give further details on these laws.

Dr. Paul Hamilton, CFP is currently offering a comprehensive planning session that will cover your specific situation in Social Security, Taxes, Retirement, and Estate Planning. The one-time fee of $500 is guaranteed to return savings, confidence and peace-of-mind. Contact him at Paul.Hamilton@USA-Economics.com to discuss your situation.

 A Free workshop covering Medicare will be held this Sunday (Aug. 14) at the Jessamine Public Library from 3 to 4pm.

 

 

 

 

 

 

 

 

 

Who Needs a Financial Advisor?

Hey Paul: We are a middle-class family with three children the oldest headed off to college next fall. We are halfway through a 30-year mortgage but otherwise do not have any debt. All our retirement savings of about $300K is in our employers’ 401(k). Do we need a financial advisor? What would be the benefits as we plan towards retirement and other life goals?

It’s a great blessing to have people in your life that you can rely on for trusted advice and accountability. The trick is, of course, how to identify those people with the skill set and character to deliver advice at a reasonable price.

The truth is that almost anyone can call himself or herself a “financial advisor”. If they provide “investment advice” then generally they need to register with the state and undergo background checks and have achieved a certification such as being a Certified Financial Planner (CFP). But that fact that a person is not a criminal and has some book knowledge of money doesn’t necessarily make them a good financial advisor.

A recent commercial (http://goo.gl/bG0tB5) features a Chase Financial Advisor visiting various retirement parties where his clients profusely thank him for making this all possible. While I am all for being grateful for those who have helped us along life’s journey, it is preposterous to claim that it was the advisor rather than the client who put in 40 years of work that is owed the lion’s share of the credit.

Perhaps the small print of the commercial should include Vanguard founder, John Bogle’s take on financial advisors:

“Our hypothetical fund investor has earned $1,170,000, donated $700,000 to the mutual fund industry, and kept the remainder of $470,000. The financial system has consumed 60% of the return, the fund investor has achieved but 40% of his earnings potential. Yet it was the investor who provided 100% of the initial capital; the industry provided none. Confronted by the issue in this way, would an intelligent investor consider this split to represent a fair shake? “ In other words your advisor brought you a bottle of wine to celebrate your retirement and drove up in the Porsche that you bought him.

Now that I have thoroughly bad-mouthed my own (side) occupation, let me provide some brighter views and various alternatives to getting good financial advice. There are several opportunities to obtain solid financial advice. For those who work in a company with a Human Resources office, some basic but very important guidance can usually be gathered on selecting a health insurance plan, flexible spending accounts, and opportunities to contribute (often with a company match) to the employer retirement account.

A second resource is your tax preparer particularly if they are a CPA. A CPA’s forte is tax planning but some have developed expertise in financial planning. Since they would be familiar with much of your finances from your tax return, turning to financial advice is a natural compliment to their services. My mother-in-law has been relying on David Hudson, CPA for many years for both tax and financial advice.

To truly receive comprehensive financial planning one must typically turn to a “financial planner” which as I mentioned earlier can mean many different things. The Hatfield and McCoy feud in financial advising is between those who are fee-based versus those who are commission based. I won’t drag you into all the gory details but much of the challenge is that people are reluctant to pay for advice but will accept a “free” financial review that almost always concludes with a sales pitch for an annuity, permanent life insurance &/or long-term care insurance. These aren’t necessarily bad financial products but often are riddled with exorbitant fees.

The fee-based financial planner is not necessarily a viable option for middle-class households. A typical comprehensive plan will run you around $2000 and for those assets they manage for you there is around a 1% annual fee. [Shameless self-promotion warning] In my own practice I charge $1000 for the plan and show the client how to manage their assets using Betterment.

Let me ask you something. When you’ve been at a restaurant and got a so-so meal did you complain to the manager? No, probably not. Your ‘problem’ is that you are too nice. And when your supposedly trusted advisor puts the hard sell on you won’t be able to say no or ask the tough questions and expect full answers.

What would be some tough questions to ask your advisor? If I invested the funds in an index fund instead of buying this financial product, what is the probability that I’d come out ahead? [No advisor will answer this. Watch out for a mildly related fact such as ‘70% of seniors rely at some point on long-term care.’] How much is your compensation for selling this product? [Could easily be more in an afternoon than you make in a month.]

Fortunately an imminent ruling by the Department of Labor is going to impose a ‘fiduciary standard’ on all financial advisors. A fiduciary is required to put the client’s interest above their own – a modern version of Love Thy Neighbor as Thyself.   The DOL fiduciary ruling will dramatically change how financial planners provide advice and sell products.

Do you need a financial advisor? You know it sounds like you’ve got some enduring financial principals figured out on your own – living within your means, avoiding debt, and working hard. My first advice would be to self-educate by reading a general book on finances as well as religiously turning to my More-Than-Money column each week. A second piece of advice is to seek out a fee-based planner and pay an hourly fee to get specific advice such as financing your child’s college education.

Dr. Paul Hamilton is an Associate Professor of Economics at Asbury University and a CFP providing financial coaching to middle-class Americans. He is available to provide free workshops to churches, local businesses and other groups.

 Contact him at Paul.Hamilton@Asbury.edu or www.USA-Economics.com