Thursday, January 23, 2014

Cost of Health Care-Medicare

Retirement planning involves covering estimated expenses in retirement from known resources. Those resources may include pensions, Social Security benefits, earnings from investments, part-time work, or any combination of the above. Estimating expenses in retirement can be a more “interesting” exercise. Many pre-retirees can make a reasonable estimate of basic living expenses (usually in today’s dollars which can be adjusted for inflation). One of the major variables, especially in the new era of Obama care, is the cost of health care over a retirement career.

Health care costs have risen over 400% since the early ‘80’s (Dept. of Labor Statistics, Consumer Price Index as of Nov, 2012). In addition, they represent one of the top three (number 2) household budget items (Infogroup/ORC , Princeton, NJ telephone survey in March of 2010). Most people assume costs will be covered by private insurance or Medicare. The private insurance situation is certainly “up in the air” given uncertainty surrounding the implementation of Obama care. But how about the health care costs associated with Medicare? According to a Fidelity Benefits Consulting estimate in 2013, the average out-of-pocket health care cost for a 65 year old couple is $220,000 (assumed no employer provided retiree health care coverage, traditional Medicare benefits, and life expectancies of 17 and 20 years respectively for husband and wife). Obviously, individual costs will vary depending your specific health level and age at retirement. To evaluate how much you need to plan on health care spending, let’s look at some of the Medicare options.

Medicare Options

Medicare has several options; these are as follows:
  • Part A- Hospital insurance
  • Part B- Medical insurance
  • Part D- Prescription drug coverage
  • Medigap- Medicare supplemental insurance
  • Part C- Medicare Advantage Plans
There are key dates associated with Medicare enrollment (generally reaching age 65)—you should contact the Social Security office to ensure compliance with those programs.

Medicare Costs

Now let’s examine some of the cost the retiree must pay under Medicare.

  1. Deductibles (paid by the retiree) for Part A (Hospital insurance)
    • Days 1-60---$1184
    • Days 61-90--$296 per day copay (29 x $296= $8584)
    • Days 91-150—“lifetime reserve days at $592 per day (59 x  $592 =$34,928)
    • Days 151+--All costs paid by retiree
  2. Costs (2013) for Medicare Part B—medical insurance
    • Monthly premium--$104.90 (increases as adjusted gross income increases
    • $147 deductible
    • 20% coinsurance paid by retiree on doctors’ services and outpatient care
  3. Prescription Drug Coverage-Medicare Part D
    • Benefits here are complicated depending on drugs (generic or branded) and the “donut” hole (i.e. that area in prescription cost in which the Medicare recipient pays the full cost of prescriptions). Suffice to say that the retiree can pay up $4,750 out of $6,735 in total drug cost.
Medigap Insurance

Supplemental Medicare insurance (Medigap) provides insurance coverage for some of the items Medicare does not cover. The basic items in this insurance are as follows:

  1. There are 10 standardized plans offering different levels of coverage.
  2. The premiums for the same coverage or plan vary with the state where the Medicare recipient resides and the insurance company providing coverage in that state.
  3. Recipients may see any doctor who accepts Medicare.
  4. There is no coverage for prescription drugs, dental, hearing, or vision costs.
Medicare Part C

Medicare Advantage plans include HMOs, PPOs, private fee-for- service plans, and Medicare specialty plans. They usually address Part A and Part B expenses and may cover prescription drugs. Expenses are less if one uses the “in-network” medical providers; however, one may choose “out-of-network” doctors (usually by paying an increased cost). Other services (dental, hearing, and vision) may also be covered.

Key Questions

As you choose your options under health care services, there are several questions you should consider.
  1. Do you have insurance coverage for dental, hearing, and vision (services not covered by Medicare)? If not, is that coverage important to you?
  2. Do you want to continue seeing your current health care providers?
  3. Have you considered the total out of pocket costs for prescription drugs—especially as you age.
  4. Do you want the ability to choose your own health care provider (particularly specialists) rather than be forced to choose from a pre-selected group of providers?
  5. Do you have protection in the case of catastrophic illness?
Total Cost
 
Total cost for insurance outlined above will obviously vary (state of coverage, income levels, and plans chosen). However, for a married couple age 65 years of age with combined annual income less than $170,000, annual costs would be $5000-$6000 per person. That is coverage for insurance only and does not include the out of pocket expenses that the couple would pay resulting from a hospital stay or prescription drugs required.
 
We, at Paragon Financial Advisors, will be glad to assist you in planning for retirement. We are fee only planners and do not sell any insurance products. Our goal is to help you make the best economic decisions for you. Implementation of those decisions is done through the appropriate professional of you choice. If you have unanswered questions or need additional guidance please call us. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.We offer financial planning and investment management services for clients.

 

Wednesday, January 15, 2014

Economic Indicators That Really Matter

The “talking heads” on the financial news networks broadcast a seemingly never-ending stream of numbers and discuss the implications of those numbers on the investment market. While we at Paragon Financial Advisors do not presume to be economists, there are some numbers which definitely warrant following. Some of the major ones follow:

Gross Domestic Product (GDP)

The gross domestic product of the United States is a measure of its economic activity. For the mathematically inclined: GDP=C+I+G+NX (or Consumption + business Investment + Government + Net eXports). Consumer spending accounts for approximately two-thirds of GDP. Some of the categories here include durable goods (autos, furniture, etc.); non-durable goods (food, clothing, etc.); and services (approximately 45% of GDP). Investments (excluding real estate) in business equipment and furniture account for approximately 18% of GDP. Third quarter 2013 GDP showed an annualized rate of about 4%; however, estimates for 2013 in total are in the 2% range. Estimates for 2014 are in the 2-2.5% range. The bottom line at this point in time is spending is up but at a lower rate than recoveries from previous recessions; non-durable goods spending is weak but improving.

Unemployment

Employment is down approximately 8 million people in the recession and about 3.5 million jobs below pre-recession levels. The most commonly quoted “unemployment rate” is the U3 rate—the current number of unemployed divided by the civilian labor force (currently 7%). There has been much discussion about this number. The “unemployed” in the numerator is affected by people dropping out of the job search and “part time” employees. Therefore, other employment data warrants consideration. The U6 rate captures these discouraged and part time workers—it is approximately 14%. Another consideration is the extended unemployment figure (unemployed persons for greater than 27 weeks). There are approximately 4 million such persons (about 3 million greater than prior recessions). One of the most significant numbers (in our opinion) is the civilian participation rate. That ratio is the number of people in the labor force divided by the working age civilian population (currently 63% and at levels not seen since the mid-1970s). From a societal standpoint, there are significant differences in unemployment rates; the unemployment rate for high school graduates over the age of 25 (with no college) is approximately 15%.

Interest Rates

Quantitative Easing (I, II, Operation Twist, and III) has increased the nation’s balance sheet by approximately $4 trillion with the first sign of tapering just appearing in December. The large scale asset purchase plan is still buying $75 billion in Treasury and mortgage backed securities per month. In addition, the second part of the interest rate plan (the zero interest rate policy) of 0 to 0.25% on feds funds appears to be in place until the 2016 or 2017 time frame. The fed funds rate in the ’81-’82 recession was 18%; in the ’74-’75 recession it was 12.5%. In spite of the excess liquidity coming into the system, inflation (see below) has been below Federal Reserve target levels. The money multiplier has dropped significantly as the reserve required for banks has been increased by banking regulators.

Exchange Rates

The rate of exchange of the US dollar vs. other major currencies is much lower than previous recessions; this rate has a direct impact on the net exports included in GDP.

Inflation

Inflation, as measured by the personal consumption expenditures (PCE) price index, is currently below 2% (the Federal Reserve desired level). The current rate (excluding food and energy) is approximately 1.5%. The PCE rises less than the Consumer Price Index (CPI); however, the CPI does not take into account “substitution” (where consumers have substituted goods whose prices are stable for those goods whose prices are rising). Lower inflation raises the prospect of deflation—a much harder problem to manage. Just ask the Japanese over the last two decades.

So what does all of this mean for the investor? Weak GDP growth, high unemployment rates, low interest rates, low foreign exchange rates, and low inflation lead to modest expectations for 2014 (as the Fed keeps QE and ZIRP in play). Pension benefit obligations of $7.5 trillion on federal government retirees and approximately $21.6 trillion in unfunded Social Security benefits are not included in our current $17 trillion national debt. These unfunded obligations, and the declining number of workers per retiree (from 9:1 to 3:1), imply that there will be significant changes in the future.  What are those changes? Ah, remember the old curse—“May you live in interesting times.”

If you have unanswered questions or need additional guidance please call us. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management services for clients.


Wednesday, January 8, 2014

Hedging with Social Security Benefits

There is much discussion in Washington these days about “entitlement reform.” An obvious example includes the Social Security system. A question that often arises in this area is “When should I begin to draw my benefits?” That question is critical since the benefits one receives is reduced if taken before “full retirement age” (which is determined by your date of birth) and increased if taken after full retirement age. For example, for an individual whose full retirement age is 66, starting social security benefits at age 62 (the first year of eligibility) will reduce the monthly benefit by 25% for the remainder of the individual’s life. Delaying the start of benefits until age 70 will increase monthly benefits by 30%. There is basically a 6.3% reduction in benefits for each year one elects to start benefits before full retirement age and an increase of 8% for each year after full retirement age until age 70. There are no further increases in benefits after age 70.

The strategy of “file and suspend” is one way to provide some benefit and still allow a couple to provide for an increase in social security benefit. The primary breadwinner (at full retirement age) can file for social security benefits but “suspend” the beginning of payments until a future time (say age 70). The spouse can receive “spousal benefits” of approximately 50% of the primary beneficiary’s benefit at the filing date. What’s the result?

  1. The couple receives some social security benefit (1/2 of the primary’s benefit) at the primary’s full retirement age.
  2. The primary can defer starting his/her benefit until a later age and enjoying an increase of 8% per year for such deferral.
  3. The spouse can receive a higher benefit if he/she uses the spousal benefit in lieu of taking his/her own benefit until a later age.
  4. If the primary breadwinner dies before the spouse, the spouse’s survivor benefit will be larger (based on the higher benefit attained through deferral until a later age).
There is some flexibility in such a choice. If circumstances change and the primary would like to receive his/her benefit prior to age 70, there are two choices:
  1. File for an increased benefit (greater by 8% per year for each year past the full retirement age) and receive that larger benefit for life, or
  2. Request a retroactive benefit based on benefits due at full retirement age and continue the full retirement age benefit for life.
For example, if the primary’s benefit at full retirement age was $2000 per month, and at age 68 the primary decided to request benefits, his/her options would be:
 
  1. Collect an increased benefit based on age 68 of approximately $2333 per month (8% increase per year for each year deferred) and that benefit would continue for life.
  2. Request a retroactive benefit of $2000 per month (based on benefit eligibility at full retirement age) for two years (24 months x $2000=$48,000) and continue receiving $2000 per month for life.
We at Paragon Financial Advisors are happy to assist you in your analysis of benefit eligibility; however, we want you to confirm your options with the Social Security Administration to ensure that your particular circumstances conform to the general guidelines. Our goal is to assist you in providing options/choices in your financial planning. No one knows what the future holds, but the more options you have, the better the final outcome will be. 
 
 If you have unanswered questions or need additional guidance please call us. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investmentmanagement services for our clients.


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