There are many retirement issues that advisors and their firms need to consider in order to be in compliance with the Department of Labor fiduciary rule, including health care costs. But like almost anything having to do with health care and insurance – both private and public – it's complicated.
For example, the premiums that retirees pay for Medicare Part B, which covers doctor visits, lab tests and medically necessary supplies, and for Medicare Part D, which covers prescription drugs, are based on income, unlike Medicare Part A, which is free.
Married couples with a modified adjusted gross income above $170,000 will pay a higher premium than their counterparts whose MAGI is below that threshold, and the Medicare premium increases above each of these higher thresholds: $214,000, $320,000 and $428,000.
Financial advisors can help their wealthier clients avoid some of these higher Medicare costs by including in the mix of investment assets products that the government doesn't consider income when calculating Medicare premiums.
For example, while IRA distributions, pension payments and ordinary dividends and capital gains are included in MAGI, distributions from a Roth IRA, Roth 401(k), reverse mortgages and health savings accounts are not.
"The product mix for investments … can make a real difference in how long retirement assets last," says Ron Mastrogiovanni, president and CEO of HealthView Services, which provides health care cost projections for financial services firms.
"Advisors have to look at what's the best product mix so that they optimize clients' income in retirement. One option, among several, is to convert future IRA or 401(k) contributions to Roth IRA or Roth 401(k) contributions.
Mastrogiovanni calculates that a 45-year-old man earning $45,000 per year annually today, which increases to $119,400 before his full retirement age, will save $150,000 in Medicare surcharges if he converts his traditional 401(k) contributions to Roth 401(k) or HSA contributions. Avoiding those surcharges is equivalent to investing roughly a $100,000 lump sum growing at about 5% annually for 20 years, says Mastrogiovanni.
Health care costs are often the single biggest expense for retirees, accounting for as much as 33% of their spending, which is nearly equal to the 34% share for housing, food and transportation combined, says Mastrogiovanni. "If advisors don't take into account health care costs, which can be very substantial, they're not acting in the best interest of their clients," he said.
