A Medicare Planning Tip

I attended a presentation recently given by Mark Annese of Jester Financial Technologies called “What Your Clients Don’t Know About Retirement Will Hurt Them.” On the surface, the presentation was about planning for healthcare and Medicare costs in retirement. Upon closer examination, however, the presentation is really about expanding means testing for Medicare, and how we’re going to pay for our care. In this, there is good news, and bad news.

I think a lot of people probably do know, whether they want to admit it or not, that healthcare costs in retirement are going to be a pretty big burden. However, as with most financial issues that are not right at our doorstep, those people tend to rationalize to ease anxiety and put off learning about what kinds of things they might do to alleviate this problem. When I raise the issue in meetings, I hear things like: “When I turn 65 and qualify for Medicare, my healthcare costs will go down” and “If I ever need long-term care, just take me for a walk in the woods.”

The bad news: in the future, Social Security will exist almost exclusively as a funding mechanism for paying your Medicare premiums, not to pay for your groceries. This has profound implications for millions and millions of Americans.

The good news: saving more of what you make for a long enough period of time, in vehicles that will produce income that doesn’t show up on your tax return, is still a viable path to a modest, but dignified retirement for a lot of us.

Medicare premiums have been income-related since the Social Security Domestic Employment Reform Act of 1994 removed the taxable wage limit for the Medicare portion of the FICA tax, but means testing for Medicare part B and D premiums became very real with the passage of The Medicare Modernization Act of 2003.

To say the financial services industry has done consumers a disservice by suggesting that they’ll be best able to contend with higher healthcare costs in retirement by simply striving for a higher rate of return would be the understatement to end all understatements. And it turns out, telling them they should max fund their 401(k) and IRA plans was tantamount to sabotage. These plans produce fully taxable income that, under the means testing models, will dramatically increase the cost of care for these beneficiaries.

If you take anything away from this post, it should be that the government is not going to pay for your care. I imagine a time when, after a long period of having no social safety net, Americans finally begin to save more of their income, as do other countries that have had little to no government support.

Sadly, for a fairly large swath of the population, there simply isn’t enough time to get ahead of this curve. But there is for most of us, if we wake up and smell the coffee. Saving three, four, or five percent of what we earn has never been and will never be enough. We all need to save more and we need to start now. The money is there for most of us, but we have to actually look at where our money is going to find it. And most critically, where we save for the future will make the difference between enslavement to health care costs and retaining our dignity and autonomy.