Many people preparing for retirement don’t fully appreciate the cost of health care and Medicare. Kyle Stuckey, CPA, PFS, CFP, provides tips to personal financial planners on advising clients on these matters. Stuckey, of JFS Wealth Advisors in Camp Hill, Pa., shares his experiences of client challenges and how practitioners can overcome them.

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By: Jim DeLuccia, PICPA Communications Manager

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Podcast Transcript

Kyle Stuckey, CPA, PFS, and CFP of JFS Wealth Advisors in Camp Hill, has conducted a lot of research in the area of advising clients on pre-retirement healthcare and Medicare decisions. He tells me that he runs into this issue frequently and has seen a wide range of client experiences. Kyle joins me on the phone today to discuss more about this issue and what it means for financial planners and their clients.

What are a few decisions advisors may not be considering or maybe they're overlooking when advising their clients on pre-retirement healthcare and Medicare?

[Stuckey] Well, I think the first thing to think about in this area, is there's just so much we could talk about. As advisers, whether you're a CPA in practice or you're kind of a comprehensive wealth advisor, as we would call ourselves, you just need to understand how far you're going to take a client into this topic.

As a firm, we've decided that we can provide some kind of high-level guidance to clients on this decision. We can incorporate how they plan for healthcare into their overall financial plan and how that affects their retirement plans. But we don't sell health insurance. When it comes down to actually quoting policies, and knowing premiums, and things like that, we will refer to experts in that area.

You want to make sure that whatever advice you're giving, you're qualified to give it, and there's never any shame, of course, in bringing in somebody that's got the expertise that you don't because this is a topic that has a lot of nuance to it. With that kind of caveat, I think the other thing that we talk about a lot is that, as financial planners, we really need to decide how we're going to estimate these kinds of expenses into the future.

We talk about healthcare and we talk about Medicare. Oftentimes, when you're planning for retirement, we just like to come up with a number that you're going to spend every year. But studies would show that healthcare is going to increase at a faster rate than the rest of your expenses, at least by the large numbers that we're seeing.

We just want to be careful that if somebody comes to us and wants to, or thinks, they're prepared to retire, that maybe they've not really broken down what that healthcare expense looks like in the world of Medicare. That's just something we want to be cognizant of.

That's a good point you mention and I keep hearing about people living longer now, so the healthcare expense is a really critical one.

[Stuckey] Sure. And the other thing, I guess, is when you talk to people that want to retire before 65, Medicare is available at 65. We need to come up with some type of private insurance or other type of insurance. And as we look at retirement projections, if you're planning to spend additional money in those early years – say you retire at 60 – you've got five years of insurance expense to cover.

We just want to really be careful, and as planners, we talk a lot about sequence of return risks. In other words, if we run into five years of down markets, or even two years of down markets, and a new retiree's spending is inflated those first couple years because they have to pay a very high health insurance premium. That could really derail a retirement plan that, on paper, looked very good. It's definitely a concern to be mindful of.

But a few other alternatives in that same group, we run into a lot of people that want to retire before 65, probably not surprising. Wouldn't we all, right? But there are some things to look at. We'll run into clients a lot that say, "Man, I went online, and I quoted a policy, and it's $2,500 a month. There's no way I can afford that."

And to be honest, private policies right now are all over the map, depending on where you live, depending on just the changes year-to-year, month-to-month. A few things that we'll instruct people to look at is, one, to talk to their employer. Sometimes employers are willing and able to keep you on their plan post-retirement, and we're seeing that be a little bit more common than it used to be.

Certainly to look at COBRA if the gap that needs to be filled is 18 months or less, you could stay on COBRA through your employer. And then also to look at any professional associations you might be a part of, to see if there's any coverage available to you that way.

What types of challenges have you encountered when working with clients in this particular area, and how have you addressed them?

[Stuckey] Well, Jim, the biggest issue we run into is just clarifying what everything is. There's just a lot of complexity to deal with, and we find clients confused on what we might think to be simple issues. Like, for example, you're eligible for Medicare at 65. You may have to sign up, there's an enrollment period for you to sign up the first time.

You're eligible for Social Security early at 62, but you don't have to take it then. And just the terminology, clients may be reading articles on Social Security, Medicare, even Medicaid, just those terms. And just being confused at what happens when they hit their 60s, and they start looking at how these things actually affect them.

And then furthermore, when you dig into what makes up Medicare, you got the different pieces. You've got Part A, B, and D. And then you start looking at supplemental plans, which also use letters. They go A, B, C, D, all the way up through E, F, G. We had a consultant come in and talk to our advisers here ahead of the enrollment period that we're in right now, just because we get a lot of questions on all this.

And us, as advisers, sat around the table and looked at each other as this expert was educating us. And we said, "Wow. This is complicated and confusing because we're talking about policies that all share the same letter."

If we're confused or if we think it's a little bit difficult to understand as CPAs, as advisers, then you can be sure the general public by and large doesn't have clarity on it. I think that's really where we can add a lot of value is stepping in, in that way.

And then the other thing, Jim, I mentioned it briefly, but it's just knowing what the critical deadlines are. If a client fails to sign-up for Medicare for the first time within the needed period, three months before, three months after their 65th birthday, the penalties are really steep. You just really want to be sure.

And the penalties then last for the rest of your life. You just want to be careful and make sure when you're working with clients, that they don't end up paying a big price that way.

That is really critical. As you mentioned, the complexities, it is a nice segue into my next question regarding the new tax laws. Do they have an impact on these decisions regarding healthcare and Medicare?

[Stuckey] There's always a connection to taxes, right. President Trump had made it a goal, as many people know, to repeal the Affordable Care Act or Obamacare, and was not successful at doing that. The ACA provisions are still in effect. However, the enforcement of the individual mandate, the requirement to have insurance, does go away in 2019.

I don't see that as terribly consequential, as we generally still recommend that our clients carry insurance. By and large, the tax landscape hasn't changed a ton. They did retain the deduction for medical expenses, which includes health insurance with a floor of, it'll be 10 percent in 2019, if you're itemizing your deductions.

Now, of course, they've also raised the standard deductions significantly, so people that used to itemize, may not be itemizing those deductions anymore. That's a consideration to look at, as well. And from a planning perspective, the one thing we run into sometimes, too, Jim, is for that retiree that's retiring, say at 62. And they want to go buy a private plan to fill the gap. Well, if they just retired and are not needing to draw on Social Security or their retirement assets yet, their income is going to drop, at least their taxable income, may drop substantially, which may be an opportunity. They may actually qualify for the premium tax credits under the Affordable Care Act.

Now whether they like that idea or not may be a different subject, but we have seen people that can qualify for that subsidy on their premiums for those couple of years, which makes it more affordable. But you definitely want to know that you qualify, you don't want to think that's a good plan, and then you end up with a little more taxable income than you expected. It blows everything up.

What are a few of the consequences that clients can expect to encounter by not taking these pre-retirement healthcare and Medicare decisions seriously?

[Stuckey] There's certainly the potential to regret making a poor decision early in retirement, like we talked about with the deadlines. Missing a deadline could impact you for the rest of your retirement. It's the same way if you join Part D, which is the prescription drug supplemental piece to Medicare.

If you decide to join that later, it increases your annual premium for the rest of your life. You want to make a good decision the first time as much as you're able to, or else you may pay for it for quite some time. As far as consequences, I suppose the worst case is for somebody that thinks they're prepared for retirement, actually isn't as well prepared for retirement as they thought they were.

Usually, when we sit down with somebody and we're putting numbers to their retirement spending plan, when we get to the topic of healthcare, it's not something they've given a lot of detailed thought to. And when we start to put averages in front of them of what typical retirees spend, it's usually surprising that it's a bit higher than maybe what they've been used to paying, as they've been covered under an employer plan for their career perhaps.

We view our role as planners to help them make sure that they're ready for retirement, rather than figuring that out when they are in their 80s, and resources are running slim. The other thing just to be aware of is, in terms of if you are going to be on a supplemental plan, those are standardized. We encourage clients to quote them annually, if possible. That way, they're not paying more in their premiums than they would need to.

I suppose that's a consequence of just not really understanding that you can do that, that we run into sometimes. And I suppose finally, another consequence is just, you look at all these decisions of how to cover yourself under Medicare, perhaps what type of supplemental policy to buy. And a lot of people just decide to buy the most comprehensive one because they don't really understand all the nuance. They don't understand what is covered, what's not covered, "So why don't I just buy the one that covers everything?"

And that may or may not be a smart decision. But it's kind of a fear-driven decision.

Kyle, you've talked about a lot of good points here. I wanted to wrap up this conversation by asking: where can our listeners turn for strong resources and advice in this area?

[Stuckey] The AICPA actually has a guide that's available on their site. It's called Financing Retirement Healthcare. I think it was updated within the last year or two. It's pretty current to the issues that are relevant today, and that's in their Personal Financial Planning Resources section.

I know we've found that extremely helpful, as we've kind of put a committee together this year, as a firm that has dug into these issues, and how we want to be advising our clients to handle them.

And then the other thing, I point clients to this sometimes, but definitely as advisers, there's an annual booklet, called Medicare and You, that's published by the government. It just kind of lays out the provisions of Medicare with lots of pictures and quick descriptions.

I'd say that's a good place to go if you just need to kind of refresh your memory on, "What is all of this? What are the different pieces? How does it all fit together?" Those are the first two things that come to mind.