Annuities, Medicare and Social Security

This week we’re starting things off with Annamarie in Pennsylvania, who at 63, is planning on retiring in the next few years. She was recently approached by her financial advisor about placing her current 401(k) into an annuity. Good idea or bad?

Next up was Susan from Tennessee who is trying to navigate things after the unexpected passing of her sister. Named as executor of the will, Susan understandably has a lot of questions.

In hour two we brought back Steve Vernon, an old pal of mine from my CBS MoneyWatch days.

Steve joined us to talk about Medicare open enrollment as well as answer some of your Social Security questions.

With Medicare's open enrollment period running through December 7, you have a golden opportunity to make changes that might better serve you in the years to come.  

Many people assume that because Medicare is called "medical insurance," it's similar to their employer's medical insurance that protected them during their working years. But that's wrong.

Employer-sponsored health care plans typically have one set of deductibles and copayments, and you only need to pay one premium to obtain comprehensive coverage. Not so with Medicare – it's much more complicated than that. Traditional Medicare has three different parts that cover hospital, outpatient, and prescription drugs – called Parts A, B, and D, respectively. Each part has its own set of premiums, deductibles and copayments. 

As a result of having these three different parts, many retirees mistakenly assume hat Medicare provides all the coverage they need. Or they think they're healthy and won't need additional insurance coverage beyond Medicare. Then they're shocked when they experience their first significant medical claim and are forced to pay thousands of dollars out-of-pocket. 

You can guard against these surprises by purchasing either a Medicare Supplement Plan (aka Medigap) or Medicare Advantage Plan. These plans are both designed to reduce Medicare's significant gaps. By one estimate, millions of retirees make the mistake of not purchasing such a plan to help close Medicare's gaps. 

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When to Take Social Security

This week we kicked things off with Troy from Seattle who was wondering if he's being charged too much by his current advisor. Does he even need an advisor? I gotta say, this is quickly becoming a very common question on the show. 

Next up was Kevin from Minnesota with the million dollar question of when is the right time to start taking Social Security? Great question, and also a very simple one to answer if you can give me one key piece of information...

If you’re working in an office environment, it’s hard to ignore the massive shift that’s taking place in the workplace. In today’s average company, up to 80% of employees’ days are now spent working in teams.

And yet the teams most people find themselves in are nowhere near as effective as they could be. They’re often divided by tensions, if not outright dissension, and dysfunctional teams drain employees’ energy, enthusiasm, and creativity.

How can we fix it? That’s where today’s episode comes into the picture, and our chat with Chester Elton, who along with Adrian Gostick, recently published The Best Team Wins: The New Science of High Performance.

Throughout the pages of their latest book, the duo share the proven ways managers can build cohesive, productive teams, despite the distractions and challenges every business is facing.

The pair studied more than 850,000 employee engagement surveys to develop their “Five Disciplines of Team Leaders,” explaining how to:

• Recognize and motivate different generations to enhance individual engagement
• Ways to promote healthy discord and spark innovation
• Techniques to unify customer focus and build bridges across functions, cultures, and distance

They’ve shared these disciplines with their corporate clients and have now distilled their breakthrough findings into a succinct, engaging guide for business leaders everywhere.

Throughout the pages you’ll find practical ways to address the real challenges today’s managers are facing, such as the rise of millennials, the growing number of global and virtual teams, and the friction created by working cross-functionally.

Have a money question? Email us here or call 855-411-JILL.

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#295 Clinton vs Trump, By the Numbers

With just over a week until the election, it's time to take measure of Clinton vs. Trump, by the numbers. Thankfully our guest Jeffrey Levine, Chief Retirement Strategist and Director of Retirement Education with Ed Slott’s Elite IRA Advisor GroupSM as well as CEO and Wealth Advisor with BluePrint Wealth Alliance, helped us sort through the candidates' plans.

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Medicare/Social Security: Both candidates want to slow the pace of health care costs by allowing Medicare to negotiate with drug manufacturers, but similarities stop there.

Although Trump called for privatizing Social Security in the past, he recently said he wants to keep the government plan in place because he believes it would be “honoring a deal.” He plans to address “the tremendous waste, fraud, and abuse in the program. But we’re not going to hurt the people who have been paying into Social Security their whole life and then all of a sudden they’re supposed to get less.” Trump's stance has generally been that he will do everything in his power to avoid touching Social Security – a position that doesn’t actually jive with that of many other Republicans – but he postulates that he will be able to do this my merely cutting waste and growing the economy. This would seem to be an incredibly difficult, if not impossible task, even using the most optimistic of projections.

Clinton wants to create a caregiver credit “that prevents penalizing those who are out of the workforce due to caring for others,” which sounds great in theory, but Levine has some serious questions as to how it would actually work in the real world. To beef up the SS retirement system, Clinton “opposes raising the full retirement age, privatization of Social Security, and any reduction in benefits or cost-of-living adjustments (COLAs)."  Levine notes that when Social Security was established, the average life expectancy was far less than what it is today, and yet the full retirement age has only increased by one year over that time. Consider that in 1940, roughly 54 percent of men and 61 percent of women surviving to age 21 lived to reach age 65. Fast forward 50 years and, by 1990, about 72 percent of men and nearly 84 percent of women could expect the same results. Under a Clinton administration, the Social Security Wage Base (currently $118,500 in taxable earnings), would increase.

Historically speaking, roughly 90 percent of earned income was subject to Social Security taxes. As the wealth and income gaps have widened in recent years though, that number has dropped closer to 83 percent. To restore that mark closer to historical norms, Clinton would need to raise the Social Security earnings cap to about $250,000 – a massive increase from where we stand today. It should be noted that even with no cap whatsoever, other changes would still have to be made to keep Social Security solvent over the long run. Clinton also seeks to make income other than earnings subject to Social Security taxation. This too, would represent a major change.

Taxes The following are tax plans to date according to the candidate’s websites and the Associated Press.

Under a Trump administration, the following tax changes have been suggested:

• Reduce the seven tax brackets to just three, at 12 percent, 25 percent and 33 percent, and cut the top income tax bracket to 33 percent from its current level of 39.6 percent.
• Cut the corporate rate from 35 percent to 15 percent, also cutting taxes on “pass-through” business income for small businesses to 15 percent.
• Eliminate the estate tax, which, as of 2016, has a $5.45 million exemption ($10.9 million for married couples) and a 40 percent tax.
• Steepen the phase-out of itemized deductions under the existing Pease limitation, which currently phases out deductions at 3 percent for every dollar that adjusted gross income exceeds $300,000 ($250,000 if single).
• According to the Tax Policy Center, Trump’s tax proposals would add a $11.2 trillion to the national debt over the next decade. Trump has largely disputed such estimates, citing that under his leadership, economic growth would double to about 4 percent, leading to more workers,. better paying jobs, and thus, more revenue.

Under a Clinton administration, the following tax changes have been suggested:

• Increase several taxes on wealthier Americans, including a 4 percent surcharge on incomes above $5 million, effectively creating a new top bracket of 43.6 percent.
• Imppose a minimum 30 percent tax rate on income above $1 million a year
• Cap deductions for wealthier taxpayers.
• Increase the estate tax exemption to former 2009 parameters of 3.5 million ($7 million for married couples), with the tax rate of 45 percent.
• Maintain current tax levels for the bottom 95 percent of taxpayers, which according to the Tax Policy Center and the most recent income and tax data released by the IRS and reported by the Tax Foundation, would mean those who earn income of $179,760 or less annually. That said, the Clinton campaign has said taxes would not rise for those making less than $250,000.
• Clinton has proposed expanding the child tax credit by doubling the credit to $2,000 per child.
• Clinton's tax proposals – when viewed in isolation – are estimated to reduce the national debt by $1.2 trillion over the next decade. However, when adding in other proposals, the national debt would increase by more than $10 trillion.

Thanks to everyone who participated this week, especially Mark, the Best Producer/Music Curator in the World. Here's how to contact us:

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Long Term Care Options

According to the government, 70 percent of people turning age 65 can expect to use some form of long-term care during their lives. Most of the care they receive comes from unpaid caregivers (generally family members or friends). In fact, a whopping one in four adults (over 65 million people) are covering about 80 percent of homecare needs and they typically spend 20 hours providing that care. Those who require more care than family members can address—and who have limited resources — may qualify for coverage through Medicaid, which is a joint federal and state program that helps pay for certain health services. If you qualify for Medicaid, you may be able to get government assistance for nursing home care or other health care costs.

Others who do not qualify for Medicaid may be shocked to learn that Medicare and most health insurance plans, including Medicare Supplement Insurance (Medigap) policies, don’t pay for more advanced services, sometimes called “custodial care”. Once they discover that they may be on the hook for covering the long-term care costs, some consumers turn to elder care lawyers to create and employ strategies, which would allow them to qualify for Medicaid in the event of a long-term illness. But in many cases, these expensive options can be unnecessary.

While there are plenty of stories about families that are forced to spend down a large chunk of their nest eggs on long-term care expenses, those cases may be rarer than you think. Most advanced care is provided by licensed home health aides, who charge $20 per hour, according to Genworth Financial’s Cost of Care Survey for 2015.

The real financial burden occurs if you need to enter a facility. Genworth found that the national median cost for a semi-private room is $80,300 (a private room costs $91,250). Those who want to protect against the massive cost of care often turn to long-term care insurance (LTCi), but not everyone needs insurance. If you have a total net worth, including a house, between $300,000 and $1.5 million, you may want to consider purchasing some baseline LTCi coverage. (Those below $300,000 can rely on Medicaid, while those above $1.5 million can self-insure.) Couples within the range are especially vulnerable, because a sick spouse can eat into assets that would dramatically change the healthy spouse’s life in the future.

I mention baseline coverage, because LTCi policies can be expensive. So instead of trying to insure the total nut, it can sometimes make sense to purchase a policy that covers some of the costs for a specific amount of time. (Statistically, women need care for 3.7 years, men for 2.2 years and one-third of today’s 65 year-olds may never need long-term care support at all.)

If you are going to purchase policy, you should make the commitment to keep it Unfortunately, a recent study from The Center for Retirement Research (CRR) at Boston College found that more than a third of those with long-term care insurance at age 65 will let their policies lapse at some point, forfeiting all benefits. Lapses could be due to the burden of insurance premiums, a late in life bet that care is no longer necessary, or worse yet, poor decisions due to declining cognitive ability. For this last group of lapsers, having insurance could be counterproductive as they buy it to protect against risk but drop it just when the risk becomes more likely.

Many insurers no longer offer this product, because it is so difficult to predict how many people will need long-term care and what the cost of that the care might be.  Unfortunately, the more insurance companies that exit the LTC business, the fewer options there are for consumers. Some of the highly rated companies that are still committed to offering LTCi include: Genworth, John Hancock, Mutual of Omaha, MetLife, MassMutual, New York Life and Northwestern Mutual.

Health Insurance: Dizzying Choices

Just in time for the upcoming benefit enrollment period, the Kaiser Family Foundation is out with its annual survey of employer health plans, which cover over half of the non-elderly population, or 147 million people. Costs are up a seemingly small 4 percent in 2015 from a year ago, but that is still twice the pace of inflation and more than the average wage gains for most families. A family plan now costs $17,545, of which workers pay $4,955. That’s up by 83 percent over the past decade and by 24 percent since 2010. Deductibles are also higher—on average now $1,077 per individual, up 67 percent from just five years ago and 255 percent over the past decade!

With more of the burden shifting to consumers, it is imperative that you take control of your health care decisions. Start by choosing the right plan for you. Know what each plan covers, how much it costs (premiums plus out of pocket costs for deductibles, coinsurance and co-pays) and whether your doctors are in the network.

The most widely used plans are Health Maintenance Organizations (HMOs) and Preferred Provider Organizations (PPOs). In an HMO, you select a primary care physician, who directs your health care decisions and makes any necessary referrals. In most cases, the plan will not cover care outside of the network. A PPO provides more flexibility, because you can see any health care professional without a referral, either inside or outside of your network. The enhanced choice comes with a heftier price tag.

Many large employers are offering high-deductible health plans (HDHP), which offer lower premiums. These plans are usually paired with Health Savings Accounts (HSA), which allow you to set aside pre-tax money to pay for unreimbursed costs. If you're generally healthy and want to save for future health care expenses, this may be an attractive choice. But if you think you might need expensive medical care in the next year and would find it hard to meet a high deductible, it might not be your best option.

You should also consider using Uncle Sam to help you pay for health care costs, by taking advantage of flexible spending care accounts. FSAs allow you to use pre-tax dollars to pay for unreimbursed medical expenses or dependent care up to $2,500. You can carryover up to $500 of unused balances to the following year.

Although most health care providers are mindful about limiting patient costs, it doesn’t hurt to ask whether a generic/cheaper version of a prescription drug exists and whether the test/procedure/prescription is really necessary. And of course, it is important to check every medical bill for coding errors.

I should also mention Medicare Open Enrollment begins October 15 and runs through December 7. This is the only opportunity for people currently on Medicare Advantage and Prescription Drug Plans to switch to a new plan for the following year.

While most medigap supplement policies can be switched throughout the year, financial planner Greg Hammer notes, “your initial enrollment is the one opportunity to enroll on a guaranteed basis. If you want to enroll into a traditional medigap policy later, in the year, you will be subject to medical questions and your medical history could prevent you from qualifying for the traditional plan.”

And just like employees who need to read the fine print, so to do retirees who are selecting prescription drug plans. Hammer advises, “Your decision should not be driven by premium alone. Because of the differences in formularies and Tier Coverage, you need to look at your out of pocket cost. A lower premium doesn't always result in the lowest out of pocket cost.” He recommends that before making the decision, participants should use medicare.gov, where you can enter your prescriptions and zip code, and the site will guide to the best program for your needs.

Medicare's Golden Anniversary

It’s the 50^th anniversary of Medicare, the U.S. government’s sprawling health care initiative, which President Lyndon Johnson signed into law on July 30, 1965. Today, Medicare covers over 55 million people including 9 million beneficiaries who are under age 65 and permanently disabled. In honor of the golden anniversary, it’s time to tackle the thorny program. A few basics: If you are an American citizen or a legal resident in the United States for at least five years, you are eligible for Medicare when you turn 65 and have paid a payroll tax for at least 10 years. You may also qualify based on your spouse’s work record. To qualify, you must be at least 65 and your spouse must be at least 62. You must officially enroll in the program, unless they already receive Social Security, in which case, you are automatically enrolled. If you or your spouse works beyond age 65 for an employer that provides you with health insurance, you can delay enrollment until you retire.

About three months before Medicare coverage starts, the government sends an Initial Enrollment Questionnaire (IEQ). I encourage you to access the robust web site MyMedicare.gov, where you can complete the IEQ, view your eligibility information, track your health care claims and check your deductible status.

There are four different parts of Medicare coverage:

• Part A: hospital services and skilled nursing facility stays of up to 100 days, as well as home health care, and hospice care. All eligible people get Part A and most receive the coverage “premium free”; others pay a premium of up to $407 per month.
• Part B: doctor visits/outpatient services/lab work/preventative services. If you earn less than $85,000 individually ($170,000 jointly), your monthly premium is $104.90. Premiums rise with income, topping out at $335.70/month (over $214,000 individually and $428,000 jointly)
• Part C: Medicare Advantage Plans are private insurance alternatives to Original Plans
• Part D: prescription drugs. If your income is above a certain limit, you'll pay an income-related monthly adjustment amount in addition to your plan premium, up to a maximum of $70.80/month

While Medicare covers a large swath of health care costs, you are on the hook for premiums, deductibles, coinsurance and copayments, unless you qualify for a low-income program, like Part D’s “Extra Help” and state assistance for Part B premiums and other costs. If you want to attain coverage for out-of-pocket expenses, you can purchase Medicare Supplemental Insurance (“Medigap”), which is sold by private insurance companies. Speaking of gaps, there are a few categories of care that the Medicare system does NOT cover, including: long-term care; routine hearing, vision, foot or dental care; or medical services provided outside of the United States.

THE NUMBERS: In 2014, net Medicare spending was $505 billion, accounting for 14% of the federal budget. Medicare is funded primarily from three sources: general revenues (41%), payroll taxes (38%), and beneficiary premiums (13%), but the current system has big financial issues. According to the 2015 Trustees of the Social Security and Medicare trust funds report, “the Medicare Hospital Insurance (HI) Trust Fund will be depleted in 2030… At that time dedicated revenues will be sufficient to pay 86 percent of HI costs.” (Current law provides funding for the other parts of Medicare, which is why the analysis focuses on the hospital side.)

The problem with the Medicare system is easily diagnosed: although the pace of health care spending has slowed over the past five years, it’s still projected to balloon due to an aging population, as well as a bloated payment system. The bitter pills offered to fix the system include: charging higher Medicare premiums for those able to afford them, raising the age of eligibility and increasing cost-sharing by beneficiaries to deter unnecessary use of medical care. Considering that the Kaiser Family Foundation recently found that by two-to-one margins, people of all political persuasions favor preserving Medicare in its current form, as opposed to replacing it with vouchers or other forms of premium support, most experts believe that Americans will have to swallow a cocktail of medicines to cure the disease.