Is Fidelity's $220,000 retirement health care figure right?
By Dan McGrath
Jester Financial Technologies
Believe it or not, the cost of health care and planning for it has yet to be taken seriously by the financial industry in any circle, even with the government, the media and the public demanding information on a daily basis. So when a firm like Fidelity decides to throw its weight behind the topic, it's hard to be critical, even when the number they use is really not close to the mark.
It seems like every spring, there is a new health care amount announced by Fidelity Investments for people who are turning 65 this year and expecting an "average” retirement. And this spring season is only slightly different from the last.
This difference lies in the total cost or the reduction of the overall cost of projected health care, which Market Watch, ABC, Kiplinger’s and Nationwide are also heralding. Those who are 65 years old today and entering into retirement are being told by Fidelity and the financial community to prepare for a total cost of $220,000 for their health care in retirement, which just happens to be a reduction from previous years' estimates of about $240,000.
As a financial professional who has been working on this specific niche for close to six years now, I am often asked about the accuracy of Fidelity's number. What I always say before offering my conclusion is that, "Right or wrong, at least Fidelity is bringing awareness to the subject."
Believe it or not, the cost of health care and planning for it has yet to be taken seriously by the financial industry in any circle, even with the government, the media and the public demanding information on a daily basis. So when a firm like Fidelity decides to throw its weight behind the topic, it's hard to be critical, even when the number they use is really not close to the mark. The reason I state that the number is not accurate and believe it may not be in the best interest of people to plan around it is due to how Fidelity is calculating the number itself.
According to the disclaimer, Fidelity derived the $220,000 number by taking “into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care,” and this is for those “individuals (who) do not have employer-provided retiree health care coverage, but do qualify for the federal government’s insurance program, Medicare.”
Fidelity also pegs the average couple as having a life expectancy of 82 years for males and females who are at the age of 65 today. Knowing how Fidelity calculated that $220,000 amount, all we have to do is look at what is already being provided to us by Medicare and some other sources. In 2014 we know that:
- Medicare Part B will cost a person $1,258.80 for the year (based on income).
- Part D, according to Q1medicare.com, will cost an individual, on average, $645.60 for the year in just premiums (please keep in mind that this premium varies by residency, income and health).
- The other costs, which Fidelity states are the “certain services excluded by Medicare,” are typically covered by a MediGap Policy Plan F (it covers all of the gaps created by Parts A and B) which, according to Weiss Rating, is $1,952 per person for the year (please keep in mind that this premium varies by residency and health).
The question going forward from this point: Is 3.72 percent the inflation rate that should be used when speaking to clients about a subject as important as their health, especially when there are other sources that can be used? Not according to PricewaterhouseCoopers, whose most recent report, titled “Medical Cost Trends,” is reporting that the overall health care inflation for all ages is expected to be 6.5 percent. And according to our very own government, through Medicare, the projected inflation rates for Parts B and D are expected to be somewhere between 6 percent and 9 percent, with the final number coming down to how low the reimbursement rate for care providers can go.
So, when you hear about the Two-Midnight Rule, please realize that it will also impact how much your clients' health care will be in retirement, too. Now, obviously, if a higher inflation rate is used, then there will be a higher number that is expected as a cost that each retiree will incur. But even with the possibility of a varying, higher rate of return, the red flag should really be the question about the odds that a person will have to actually be able to buy health insurance at the national average.
If a couple just happens to reside in a state like Florida, where plenty of people like to go during retirement, the average MediGap Plan is not $1,952; it’s higher, at roughly $2,826. And this is not the highest premium, either. For Part D, the problem is the same, especially in Florida. Instead of an average cost of $645, it is close to $750 a year. Again, this is not even near the highest premium!
Unfortunately, the real health care number is not one that should be ball parked, as people and their health are as different as anything can be. Once we factor in the secret of means-testing, everything may just get thrown out the window anyway. See? There are other factors besides residency when it comes to the cost of health in retirement, and one of the biggest factors just happens to be income. Fidelity does disclose that the Medicare Income Surcharge is not being implemented at all in its $220,000 amount. Due to the Medicare Modernization Act of 2003 and the Affordable Care Act, a retiree’s Part B and Part D premiums will be based on income, too. This means that Medicare, along with Social Security and the IRS, will look at a person’s income to see if they are earning more than the average amount determined by the government in a given year. If there is more income being earned than the set limits, then the person and spouse will be surcharged a higher fee.
So what happens if a person happens to be earning too much income in retirement? Well, according to Medicare, the person and their spouse will be hit with an extra 40 percent to 220 percent more in premiums for Part B and an extra $145.20 to $831.60 for Part D premiums. But, will your clients actually get hit by this surcharge? The answer, as with everything related to health costs, is that it depends. Keep in mind that since the implementation of this “surcharge” in 2007, only about 5 percent of all beneficiaries were impacted by this. But unfortunately, the number has risen to about 11 percent since then. Please also keep in mind that o page 38 of the 2014 Presidential Budget, it clearly states that there may be adjustment in this Medicare Income Surcharge bracket until “25 percent of beneficiaries under Parts B and D are subject to these premiums."
Starting in 2017, when the oldest baby boomers reach the age of 70.5 and have to take their Required Minimum Distribution (RMD) from any tax-deferred accounts they have, the budget is also calling for a restructuring of the “income-related premiums under Parts B and D by increasing the lowest income-related premium five percentage points, from 35 percent to 40 percent and also increasing other income brackets until capping the highest tier at 90 percent."
By the way, Social Security defines income as everything on lines 37 and 8b of IRS form 1040, which is income from things like: wages, Social Security, income (rental and pension), capital gains, dividends (including those from muni-bonds) and withdrawals from any tax-deferred account, with the exception of Roth accounts.
Ultimately, everything but certain types of life insurance, specific annuities, Roth accounts, 401(h) accounts and health savings accounts are considered to be income. (Hopefully, some can see the vast opportunity that awaits the financial firm, advisor or agent who grasps this, as the solutions to controlling health costs in retirement are life insurance and annuities.)
With this information in mind, can it be concluded that Fidelity’s number is accurate or not? That is for you to decide, but citing a number that may be using a much lower rate of inflation than provided by the government — one that is using just “averages” when dealing with your or your client's health — is sort of dangerous. But again, Fidelity must be given credit for at least picking up the torch and shining the light on this subject. Because of Fidelity, people will be better prepared to plan for not only their largest expense in retirement, but also their greatest asset, their health.
By the way, certain Medicare premiums and all surcharges will be deducted automatically from a person’s Social Security benefit. This means the more income one has, the higher health costs they will have, thus resulting in having a lower Social Security benefit. A simple way to help control health costs, lower taxes and save income in retirement is to implement certain types of life insurance and very specific annuities. And the simplest way? Using Roth accounts or, more specifically, Roth 401(k)s. Health costs in retirement is a big problem, but the great news is it doesn't have to be. It just has to be correctly planned for, because what you don't know about retirement will hurt you.