The Healthcare Reform Law and how it Affects Retirees

The health care reform law will bring a mixed bag of good and bad news—with many of the changes affecting benefits provided to retirees by former employers. Here's a look at the key trends that will impact retiree health care spending.

 
Good News: Improved Medicare Prescription Drug Benefit----The Affordable Care Act (ACA) boosts the value of the Medicare D prescription drug plan by closing the notorious “doughnut hole.” That's the coverage gap that starts when a beneficiary's annual drug spending hits $2,830, and resumes at the catastrophic level ($4,550). Fidelity estimates that about 30 percent of seniors enter the doughnut hole in any given year.

Good News: Pre-65 Insurance Options Multiply--Workers who retire before age 65 – sometimes involuntarily – face some tough challenges replacing the group health coverage they enjoyed at work. The ACA creates new public health insurance exchanges that will open for business in 2014. Their aim is to create competitive marketplaces offering individuals high quality, affordable coverage. At the same time, insurers will be barred from turning away applicants due to medical conditions, or charge them higher rates – although they will be able to charge up to three times the differential between the oldest and youngest insured in the plan. Finally, the ACA offers a combination of credits and subsidies aimed at keeping policies bought in the exchange affordable

Mixed news: Health Savings Accounts Proliferate--Health Savings Accounts (HSAs) can help workers save money to offset health expenses down the road in the retirement. Created during the Bush years, HSAs have very attractive tax features: contributions and account growth are tax free—as are withdrawals, so long as the funds are used to pay for healthcare. Unused funds can be rolled over from year to year, and the accounts offer IRA-like portability. HSAs are gaining ground among workplace plan sponsors, mainly because they are tied to high-deductible insurance plans that reduce premium costs up to 30 percent. About 27 percent of retiree plan sponsors offer an HSA option, according to the Towers Watson/National Business Group on Health survey. But 25 percent of companies plan to convert their current retiree health coverage subsidy in the coming year But the jury's still out on HSAs as a retirement saving vehicle. Most participants use the accounts to fund current-year expenses, since insurance plan annual deductibles linked to HSAs must be at least $1,200 for individuals, or $2,400 for family coverage. And the deductibles can run much higher. As a result, Fidelity says only 24 percent of HSA accounts at plans it administers are used for long-term saving.And, since HSAs have only been on the scene a few years, average account balances are quite small, averaging $1,355 in 2010.

Bad news: Affluent Retirees Face Steep Hike in Medicare Premiums--The ACAACA freezes the threshold at 2010 levels through 2019, starting this year. The ACA also extends the income threshold formulas to seniors enrolled in Part D prescription drug plans. The changes will affect just five percent of Medicare enrollees this year, although that figure will rise to 14 percent by 2019 as more seniors jump past the frozen income threshold levels, according to the Kaiser Family Foundation, a non-profit health policy and research organization. High-income seniors who pay both Part B and Part D premiums could see their combined premiums rise anywhere from $300 to $700 per month by the end of the decade, according to Juliette Cubanski, associate director of Kaiser’s Medicare Policy Project. “That’s a considerable sum, considering that the base Part B premium for most people this year is $96.40,” she says. The new income thresholds also affect people who choose a Medicare Advantage plan (Part C). These are privatized managed care plans that replace traditional Medicare, and usually incorporate prescription drug coverage. Advantage enrollees typically pay the monthly Part B premium plus a supplemental premium to the Medicare Advantage plan; now, these premiums are being adjusted to factor in the higher-income amounts for Part B and Part D coverage, where applicable.

Credit to Mark Miller who is a journalist and author and writes about trends in retirement and aging. He has a special focus on how the baby boomer generation is revising its approach to money, careers and lifestyle after age 50.

Asset Location, Location, Location

Asset location is deciding what assets should go in which accounts.  Most investors have accounts that receive different tax treatment such as the following:

• Traditional tax-deferred account such as IRA , 401k, 403b, 457.  Contributions may be tax deductible and the growth and income are not taxed until the money is withdrawn.  Withdrawals then taxed as ordinary income ranging from 10-33%.
• Roth IRA or Roth 401k.  Contributions are not tax deductible but withdrawals are tax free
• Taxable non-retirement account.  The taxation of these types of accounts depends on the investments in the account.  Short term capital gains and interest from bonds and CDs are taxed as ordinary income, but qualified dividends and long-term capital gains are taxed at lower rates between 0-15%.

So..what types of investment should go in these different types of accounts to minimize taxes and create greater wealth?

• Traditional tax-deferred.  Corporate bonds, treasuries, TIPS, high yield stocks and commodity funds
• Roth accounts.  Small cap stocks, REITS, high turnover and/or high yielding funds especially if they have above-average growth potential.
• Taxable non retirement accounts.  Low-or non yielding stocks you plan to own for several years, low turnover stock funds (such as Index funds and tax managed funds), municipal bonds, US government savings bonds and maybe Treasuries. 

Remember:  It's not how much you make but how much you keep that matters in creating wealth. 

Living an Extraordinary Second Half

With over 76 million baby boomers entering their "golden years", some folks find it a little daunting to imagine what life will be like during retirement.  This is a compilation of some strategies and ideas that I have gleaned from my readings:

1)  Money is all about numbers.  Happiness is all about attitudes and behaviors.
2)  Live below your means if you want to be comfortable in retirement.  Pay yourself first and build your lifestyle around these two habits. 
3)  Have a plan.  A road map to retirement is as necessary as breathing oxygen. 
4)  Start saving early.  But remember that it is never too late to try and catch up. 
5)  Take care of your health.  A nutritious and low fat diet combined with exercise and stress reduction will ensure that you make it to retirement.
6)  Hang out with people who make you feel good and enrich your life.  Ditch the negative influences.
7)  Invest like a millionaire.  Work with a fee-only advisor with no conflicts of interest.  Take a long term view and keep your costs as low as possible.  Don't chase the "hot tips" your friends or the media tout. 
8)  Stimulate your brain with constant learning, taking trips, reading, trying new things, making new friends. 
9)  Create your bucket list.  Go for it.  Be engaged in life. 
10)  Give back with your time, talents and treasure.  Create a legacy

Following these ideas will truly allow you to enjoy those golden years and live a full and glorious life.