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.

 

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

 

 

 

 

 

 

 

 

What One Economist Thinks about Obamacare

Hey Paul: I am 60 years old and just retired. I have $500K in my retirement accounts, $200K in mutual funds, and a $300K home. I know I can’t start Medicare until age 65. What should I do for the next five years to secure health insurance?

 Well typically you’d have to look into private insurance (expensive) or COBRA (expensive) or just try to stay healthy and pay out-of-pocket for medical expenses (risky). Maybe I shouldn’t be telling you this but just between you and me, Obamacare provides a great deal for people in your situation. The eligibility for health insurance premium subsidies is solely based on annual income not wealth. So someone like yourself with a net worth of $1M but without earnings, not withdrawing too much tax-deferred retirement income and not yet drawing social security benefits can be qualified for significant subsidies to your insurance.

I am starting to sound like one of those “one weird trick will save you thousands” pop-up adds but you do have to have the right mix of taxable income. If it is below 100% (or 138% in KY) of the Federal Poverty Level then you could be eligible for Medicaid. But Medicaid also has a wealth test that you miserably fail — essentially you can have a home and car but essentially no financial assets. You need to have income between 138% and 400% of the FPL to remain eligible for Obamacare subsidies.

Potentially you could use your retirement funds to hit the right taxable income and then use your mutual funds to maintain your desired standard of living. Of course the only goal in life is not to appear poor to draw government assistance so perhaps your insurance plans will necessitate looking into other options.

Hey Paul: What do you think about Obamacare?

First let me concur with Senator John McCain on his characterization of our President: “He’s a decent family man and citizen that I just happen to have disagreements with on fundamental issues. He’s not an Arab.”

On the positive side Obamacare has provided about 500,000 Kentuckians with free or heavily subsidized health insurance. There has likely been more work provided for medical professionals and their associates. I am not aware of any significant layoffs as employers couldn’t afford to pay another expensive employee benefit. This is due in part to the exemptions for small businesses to provide employer-based insurance.

On the downside I think Obamacare “worked” for two reasons. First the U.S. medical and insurance industry was and still is bloated with inefficiency and unexplainable high costs. Obamacare has soaked up some of this waste and put it towards health insurance premiums. However the health system remains on an unsustainable path. Second, as the examples in this column have illustrated, the large uptake in insurance is basically due to the huge subsidies. No company would claim success on an extraordinary give-away program.

So what’s wrong with Obamacare? Let me relate my own personal experience in taking my wife in the middle of the night to the ER for severe stomach pains. While waiting to get her admitted we sat in the lobby area. I put my hands over my face and doubled over letting out a dull grown. My wife asked me if I too was feeling sick. No, I said, I just was reacting to being in place without prices — a living hell for an economist. She felt no sympathy.

The problem with the American medical industry and the attendant insurance business is not that we need government subsidies or to allow interstate competition or anything else being put forward by our current or next President. We need to let people make decisions based on information including prices and quality of services. Our current system including Obamacare invites a “buffet strategy” with very limited incentives to economize on our use of precious resources.

About 15 years ago there was a push for high deductible (catastrophic) plans coupled with Health Saving Accounts. This was a big step in the right direction. But prices remained a mystery so the system remains broke. In the mean time, I’ve found that after a doctor’s appointment that wondering through Lowe’s observing the posted prices restores my belief in the capitalism system.

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

 

Obamacare and Taxes

Hey Paul: We are the classic American family with a nice home, two kids and a dog. We both work with a combined income of $50,000. I am self-employed and my husband works for a small business so we don’t have employer provided insurance. Are we eligible for Obamacare?

Sounds like a really nice life you’ve carved out for your family. All you need now is health insurance and maybe a boat. Yes, it appears that you meet the criteria to received subsidized health insurance through the Affordable Care Act (aka Obamacare). The main criteria are that you have a “modest” income and are not eligible for employer or government insurance such as Medicaid or Medicare. For a family of four you could make up to $95,400 in 2015 and be eligible for Obamacare. In KY Medicaid has been expanded up to 138% of the Poverty Level that for a family of four would be about $32,913.

Medicaid coverage is great as it covers essentially 100% of medical expenses – no premiums, no deductibles, no co-pays (ok, literally $1 in some cases). Well you don’t get quite that good of deal. Your annual premium is capped at 6.63% of your annual income — $3314 per year or $276 per month. The government will pay the premium difference to afford the second-lowest silver plan available in this area. This plan would cost about $7000 so the U.S. government is picking up over half the tab. If your finances are good and health is bad you could opt for a Gold Plan with lower expected out-of-pocket costs. If your finances are bad and health is good you could opt for a Bronze plan and pay only $187 per month or $2187 annually in premiums. For readers with different situations you can quickly get your numbers at http://kff.org/interactive/subsidy-calculator/

The ACA enrollment period runs through mid-November through mid-February so currently you cannot join. If you have had a significant life event – change in employment, family size or marital status then you can join outside the regular sign-up months. The penalty for not having any type of insurance including forgoing Obamacare jumps to $2085 in 2016 – just slightly less then what you pay for a Bronze plan.

Hey Paul: Our family signed up for Obamacare coverage in December. How does this impact our tax filing in April?

The Affordable Care Act (aka Obamacare) uses the filing of taxes to adjust the amount the government subsidizes your health insurance. Since you have just begun receiving assistance with your healthcare insurance costs in 2016 you shouldn’t have anything to report next month as that applies to 2015.

The vast majority of households receive direct subsidies paid to their insurance company during the year. One could opt to pay fully out-of-pocket and then be reimbursed when you file your taxes the following April. However it usually makes sense to go ahead and take the credit throughout the year and then settle at tax time.

For those who received direct subsidizes through Obamacare, their 1040 will require them to verify their family and income situation. If they ended up making a higher income &/or having a smaller family size then they will need to repay part of the insurance premium subsidy.   The maximum repayment for couples and families ranges from $600 for those under 200% of the Federal Poverty Level up to $2500 for those at 400% of the FPL. For those who ended up making more than 400% of the FPL will need to repay the full amount.

Conversely those whose income was lower than expected during the enrollment or have had an addition to the family will be able to receive a tax credit to reflect their true economic situation in the past year.

As I harp on every week in my tax series, any of the free or low-cost tax prep software will walk you through the necessary information and do the math for you!

Hey Paul: I am 24 years old and making a good income but at a small company without health insurance. What can President Obama do for me?

President Obama has a couple of good options for a young person particularly if you are in good health. First, part of Obamacare is to extend dependent coverage up to age 26. Personally I believe that if you are 26 and your Mom is still cooking dinner and doing your laundry and paying for your health insurance there are some codependency issues going on. But by law group plans have to extend this option – if your parents also agree to continue family coverage rather than move to a single or couple plan.

If you can’t get on your parents plan another good option for those under 30 is a catastrophic health insurance plan through Obamacare and the marketplace exchange. “Catastrophic” plans are insurance the way God intended them to be. They are high deductible plans with the first $6600 of expenses other than preventative care coming out-of-pocket. The upside of these plans are they offer the cheapest premiums and may motivate not over-consuming medical services and positive lifestyle changes. Obamacare Silver and Bronze plans for you would run only about $165 and $138 per month, respectively. The catastrophic plan premium will be even less and worth a look!

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

 

Prepare to Plan Your Taxes or Plan to Pay More

Hey Paul: What is the difference between “tax planning” and “tax preparation”? Are they the same thing?

These two terms are closely related and I suppose could mean the same thing to some people. For those who are procrastinating doing their taxes until April 18th could claim to be in the planning stage – collecting W2’s, charitable gift receipts, etc. But tax professionals would refer to everything you do to get your 1040 done as “tax preparation.”

Tax Planning typically refers to the development of tax saving strategies that precede the tax preparation stage. Tax planning takes place in the calendar year before taxes are settled the following mid-April — after December 31st there isn’t much you can do about last year’s finances.

The following is a list of “tax strategies” you can think about implementing this year – or perhaps serendipitously you can use for 2015 taxes if your story fits.

  • Contribute to qualified retirement accounts: By making an IRA contribution or other tax-deferred income such as to a 401(k) during the year you will delay taxing that income. For the roughly half of the U.S. households who pay no Federal income tax, contributing to a Roth IRA will result in little or no additional Federal income tax now and tax-free withdrawals in the future.
  • Cover health care expenses pre-tax: For those with employer-provided health insurance, you can pay no Federal, state, or payroll taxes on your share of the premium. Flexible Spending Accounts (FSA) have similar tax benefits and cover out-of-pocket medical expenses including dental and vision. Starting last year FSA plans have an option to rollover up to $500 of unused funds; in the past it was a use-it-or-lose-it fund. Health Savings Accounts (HSA) need to be coupled with high-deductible health insurance and are essentially a bigger version of an FSA.
  • Itemize rather than take the standard deduction: The major categories are charitable giving, taxes (property, state income or sales taxes), and mortgage interest expense. For single and married households the standard deductions are $6300 and $12,600, respectively. These are high hurdles to cross if you don’t have a mortgage. One strategy is to lump deductions into a specific year by making early property tax payments or high charitable giving.
  • Start a side business: Small business owners love their write-offs – home office space, cell phone, business related mileage, etc. Landlords are infamous for having accounting losses due to depreciation of the home while actually having a fairly profitable rental business. Put your child to work as part of the family business and they will pay no taxes on the first $6300 of their income — more importantly you turn an allowance into an earning.
  • Give money away: Giving is not only good for the spirit but also to avoid taxes. If the gift is to a qualified non-profit than it may be deductible as an itemization. Another strategy is to gift (up to $14K!) to anyone. Give away assets that have losses or small gains since you acquired them and try to leave highly appreciated assets as part of your estate when they will escape capital gains taxation. To whom should you give? One idea is to set up a Roth IRA or 529 College Savings plan for a child or grandchild. These investments grow tax-free and withdraws are tax free if used for retirement or college. You can also give directly (up to $100K!) from your tax-deferred retirement account to a charity – this escapes taxation entirely on that income.

For the rich-and-famous tricks such as characterizing business income as a capital gain that is taxed much lighter than regular income and avoids payroll taxes. This is one way Wall Street hedge fund managers and CEO’s pay less tax than their secretary. If your patriotic ties aren’t binding you could move to a foreign country – or at least shift your assets to the Cayman Islands. At some point we cross the line from tax avoidance to tax evasion!

If you missed the opportunity to purposely reorder your 2015 finances to qualify for lower taxes there still exists the opportunity to make the most of what naturally occurred last year. Here are the things you can do to be a smart tax filer:

  • File your taxes – it’s the law and you may actually get 1000’s of dollars from the IRS. In my estimation there is a much more money left on the table by those who don’t file or miss obvious tax savings compared to those who don’t file thinking they are beating the system.
  • Use low-cost tax software, free tax prep such as offered by the AARP (Mon. and Wed. mornings at the Jessamine Public Library) or a tax professional. I would highly advise against the old-school method of pencil, calculator and tax instruction booklets!
  • Take the tax credits that you qualify for – EITC, child tax credit, various college education credits, retirement contribution credits and many other tax savings are potentially there for you. Tax software or a qualified preparer will (almost) certainly catch all of these as long as they know your story.
  • Contribute up to $5500 (or $6500 if over 50) to an IRA. This will delay when the income is taxed which may be lower in retirement than in your working years. You can make an IRA contribution up to the tax deadline and have it count for 2015.

So by spending a few hours a year preparing taxes you can save a few hundred dollars in fees; By spending a few a few hours in tax planning you can potentially save much more by choosing the favorable actions and timing to minimize your tax liability.

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