Ben Storey, head of retirement research at Bank of America, has called health care "the biggest retirement expense people fail to plan for."
That's a problem, because medical expenses tend to dramatically increase in old age. In this wide-ranging discussion in our Leaders forum, Storey talks about the many ways financial advisors can help clients prepare for the health care costs of their golden years, long before they retire.
During our conversation, Ben mentions a "checklist" of actions people can take to prepare for those expenses. Viewers asked Ben to share a link to that checklist, and he kindly obliged. To view Bank of America's "Preparing for Longevity Checklist,"
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And to watch our conversation with Ben Storey, simply click the video at the top of this article. A transcript of the talk is included below.
Transcript:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.
Nathan Place (00:09):
Hello and welcome to Leaders! Thank you for joining us. I'm Nathan Place, retirement reporter at Financial Planning, and today we're talking about health care costs, which are an important but sometimes overlooked part of retirement planning. Luckily we have an expert with us here today, Ben Storey, director of retirement research at Bank of America. Ben, thank you so much for joining us.
Ben Storey (00:32):
Thank you, Nathan. It's my pleasure.
Nathan Place (00:34):
Yeah, yeah, the pleasure is all mine. So I'll just dive right in here. You've called health care the biggest retirement expense people fail to plan for. What do you mean by that? Why is this expense so important and why do people often overlook it?
Ben Storey (00:50):
Well, I think there are a variety of reasons that they overlook it. One is the fact that during our working years, for most people, we have coverage through our employers. And so it tends to be something that we certainly enroll, we have the coverage each year, and then we kind of tend to forget about it over time. And you also have some individuals that feel like Medicare is certainly going to cover all of the expenses. One of the other things that we've seen, and this comes from our
Nathan Place (02:01):
And to that end, one of the things that you suggest that people do to prepare for these expenses, and one of the things that their financial advisors can help them with, is a
Ben Storey (02:17):
Absolutely. So a couple different things you should consider. One of the ways that I like to do it is think about some of the things that we need to be planning for our clients as they approach 65. So think of it as those that are under 65. Some of the questions that we're going to be asking, things like has there been any changes as far as when they plan to retire? A good example of this would be if someone was planning to retire, let's say before 65, there's some other things that we need to take into consideration, asking if there's been any significant changes in health, for example. What about resources that have been set aside? If they are saving for health care, have there been any changes there? Have they had to use these resources? Also, thinking about things like do they have a health care proxy? Are they contributing to a health savings account? So by having this checklist, you can really go through and make sure that we're not missing any pieces of the puzzle. Once they turn 65, you have to start thinking about how are we tracking as far as the expenses that we were anticipating and go through those checks on really an annual basis is what I would recommend.
Nathan Place (03:53):
Right, right. Absolutely. And I want to talk about Medicare, which you mentioned a minute ago. As you said, a lot of people kind of assume that Medicare is going to pay for most or all of their health care expenses, but that's not necessarily the case. And I think a lot of people don't know just how complicated the program is and how many difficult decisions and choices they're going to have to make in order to get the most out of the program. Can you talk a little bit about some of those difficult decision points? What choices are people going to face?
Ben Storey (04:25):
Yeah, absolutely. What we find is that Medicare typically will cover about two thirds of our expenses as they relate to health care in retirement. But it's that other third that we're going to have to cover. And so if you look at, for example, someone that is currently 65, the expenses are approaching on average, and this is throughout the country, they're approaching about $8,000 per individual. So for a couple, that's $16,000 a year. Now, what we tend to find is that people, as you mentioned, are very confused when it comes to the different options. And what typically happens is as they approach 65, they're inundated with a lot of information, a lot of mail about all the different options that are going to be available. So I think what's important is to really help them understand and break it down into smaller pieces. So the first thing at a very high level that people should think about is two basic options.
(05:44):
Do they want to go with original Medicare? Think of that as Part A for your hospital, Part B for the medical, or do they want to actually go with Medicare Advantage? So that's like a private alternative. Now, if they choose the first choice, they then have to think about adding a prescription drug plan. So that would be a Part D plan. In addition to that, they can add a supplement or Medigap plan. And what makes it a little bit confusing for clients is the Medigap plans are also listed by letter, but it's plan A, B, C all the way down through the alphabet. So not to be confused with Part A or Part B. There are some differences, which I know we'll talk about in a little bit, about the differences between Medicare Advantage and original Medicare, but at a high level, making sure that they understand option 1 versus option 2 and some of the pros and cons of each option.
Nathan Place (06:51):
Yeah, yeah, absolutely. Well, why don't we jump ahead to that because I think this is a source of a lot of confusion for clients. One of the things I think people get confused about is Medigap and Medicare Advantage, and I don't think everyone knows the difference between those two products. Can you explain the difference there a little bit?
Ben Storey (07:10):
Yes, yes, absolutely. So with option 1 that I mentioned, you still are going to have copays and out-of-pocket expenses, and that would be with original Medicare. So think Part A, Part B, the prescription drug plan that you're going to have. But those out-of-pocket expenses can be covered by adding additional insurance. And this is offered through private insurance companies. And essentially what it does is it just as the name implies, Medigap, it helps fill in some of those gaps. So what this does is it really smooths out the expenses that one may have and it makes them more predictable. Now, when we think about Medicare Advantage, think of this as you're taking, and this is option 2, and you're bundling everything in one plan. As I mentioned, it's the private alternative to original Medicare, and this is going to be offered through private insurance companies. So it's a little bit different arrangement.
(08:25):
Some of the other differences that you'll have, like original Medicare will not cover things like dental, vision, hearing, where the Medicare Advantage plans typically will cover that. That's one of the advantages of that type of plan. Now, the original Medicare, though, offers some additional flexibility as far as not having to navigate being in network or out of network, which is what you can find with the Medicare Advantage plans. So it's not one is necessarily better than the other, it just depends on the individual situation. And that will determine which one may be a better fit for an individual client or couple.
Nathan Place (09:11):
Right. And it's also the role that those two insurance products play in terms of their relationship to original Medicare. I often find it a little confusing, and I wonder if some clients also do, that Medicare Advantage is sometimes referred to as Medicare Part C, when in fact it's not really a separate, it's not really a separate part from parts A and B. It replaces A and B to some extent, right? Can you explain that a little bit about the role?
Ben Storey (09:39):
Yes, that's correct. So technically what you would do if you were going to enroll or a client was going to enroll in Medicare Advantage is they would enroll in part A and B and then select Part C as the option, which is the Medicare Advantage plan. And essentially just as you mentioned, it bundles everything together under the private insurance. So it's a different arrangement. As I mentioned, it's an alternative, but you just have to be aware of some of those differences that I mentioned. The biggest thing that I see when working with clients is the fact that a lot of times, especially the higher net worth clients, they want greater flexibility and that tends to lead them towards original Medicare. Now, our goal, and I think this should be the goal of any financial advisor, is to provide enough information that they're able to make an informed decision. We're not necessarily making a recommendation on which one to go with, but we are providing information to help them make that informed decision.
Nathan Place (11:00):
Right, absolutely. And you mentioned before that this set of challenges is a little bit different when you have more affluent clients, and one of the challenges that those clients will have to face is IRMAA, the dreaded IRMAA surcharge.
Ben Storey (11:17):
Right.
Nathan Place (11:18):
Now, what that essentially means, that surcharge, is that people can get sort of, in a way, punished for having too much income. Can you explain a little bit what that surcharge is, what it does, and how advisors can help clients avoid getting hit with too big of a surcharge?
Ben Storey (11:36):
Absolutely. So what's important here is just to be aware and be mindful that Irma may come into play for certain clients. So the way this actually works is if you exceed certain levels of modified adjusted gross income, it will increase the premium that you're going to pay for part B and prescription drug coverage. So the Part D coverage, so this can be a pretty significant increase and it is tiered based on the level of income for a particular client, and it would apply to if it's a couple, to both individuals if they're enrolled in Medicare. So a couple of things to be aware of here. Really what this comes down to is making sure that we're thoughtful in how we're planning for future retirement income and being aware if we do hit certain thresholds that it could trigger Irma. The other thing that we find that is a bit confusing for clients is the fact that if you do nothing, they will simply meaning of Medicare and Social Security, they will use your income from two years earlier.
(13:08):
So a lot of times what I find is clients will retire, they start Medicare, and the numbers they're using for the modified adjusted gross income are from two years prior. So for example, someone that was working in 2022 but's retired in 2024, they're paying this greater amount due to the fact that it just hasn't caught up. And part of that's the delay for the tax returns if someone files an extension, for example. And so what you can actually do here is have your client fill out a form. You can certainly search on Google and pull up, it's a Medicare income-related monthly adjustment amount, life-changing event form. And essentially what that will do is allow the individual to indicate how much they're actually projected to earn in that year due to the change in income due to the fact that they retired. So it brings that figure down. Now, one word of caution, you also have to think about things like distributions from retirement plans. Think about things like Roth conversions could have an impact. Stock options could have an impact. Sometimes what I see is people aren't impacted until their RMDs begin. And then that's a big surprise. So from a planning standpoint, work with the client's tax advisor, make sure that they are aware of these different thresholds, and the whole idea is to try to manage it throughout retirement the best you can.
Nathan Place (15:02):
Right. In other words, if you're signing up for Medicare at age 65, age 63 is a bad time to sell your house. You don't want to do that, right?
Ben Storey (15:10):
Or if you look at it like this, if you've retired, letting Medicare know that that income from two years earlier is not an accurate representation of what your income will look like in the current year that you're applying. So that's the whole idea is to make sure... Also thinking about, yeah, if you've, let's say you had the choice of doing a Roth conversion before or after you started Medicare, everything else being held equal, it would make more sense to do it before versus after because that could push you into a much greater threshold and then result in higher expenses for part B and part D. And one thing to keep in mind is just simply by going with Medicare advantage, that doesn't get you out of Irma. So just something to be aware of there because technically you're still enrolled in part A and B, you've just selected the Medicare advantage as your coverage.
Nathan Place (16:28):
Right. Definitely something to consider if you're thinking of enrolling in Medicare Advantage if you're already paying for part A and B in original Medicare, that might be a reason to, I don't know, to consider sticking with the original perhaps. You've also talked about the need for contingency planning when it comes to health care expenses and how to work that into retirement planning. Can you explain what you mean by that? How can you work contingency planning into your retirement planning?
Ben Storey (16:57):
So the way that I like to explain it and really think about it is you have those everyday expenses that we're all going to have when it comes to medical care periodically going to the doctor, your physical on an annual basis, for example, routine things that for the most part, all of us are going to experience. These are the things that I think of as being more predictable and what those expenses would be. And over time you start to recognize those costs, what they may be, and they're a little bit easier to predict. Now, some of the other expenses that you could have would be maybe a major health event that can be something very difficult to predict. If not impossible, this could be due to some type of injury, maybe requiring surgery. This could be due to maybe some type of accident, maybe it's some sort of disease or ailment that progresses. So for these types of expenses, having that emergency fund that can help step in and cover these expenses is certainly important. The other big one, and we see oftentimes people fail to plan for this, is long-term care. So I think of long-term care.
(18:44):
The longer we live, we have certainly a greater probability of needing it, but in some cases we may need it. In other cases, individuals will not. But that can be a big contingency that you certainly have to plan for.
Nathan Place (19:02):
And what are some of the ways that you can plan for long-term care?
Ben Storey (19:07):
So a variety of things to consider here. One thing I would encourage advisors to do is really start the planning earlier, rather later. Kind of the sweet spot, especially if you're looking at leveraging various insurance products would probably be when a client is in their fifties, for example. So exploring things like traditional long-term care insurance that's going to provide the most robust coverage, it is going to be the most expensive as well. And part of the reason you want to look at that early is you want to make sure that the individual could qualify. There's also some hybrid policies that provide some level of coverage in the event that you need long-term care or there's a chronic illness that then also work as an insurance policy life insurance policy that is, so those, it's kind of like if you don't use it for the long-term care, there's still a benefit that could pass on to your heirs.
(20:27):
And then in some cases you can actually request a refund of the money if you don't use it or plans change. And then of course, some life insurance policies have a chronic illness rider. So essentially what's happening here is in the event that you have a chronic illness, you could actually accelerate the death benefit and have some funds that could be used to cover those expenses. One other thing I'll mention here is it's very important to also think about if you're married, you want to make sure that one individual doesn't deplete all the assets due to a long-term care expense, and then the other individual is left in a precarious position. One final comment I'll make is the fact that in some cases people may self-insure, which is certainly an option. What I always stress is you want to make sure that you have a plan that is key, but self-insuring can be quite expensive. So sometimes we even see people do more of a hybrid when they look at covering this type of expense.
Nathan Place (21:51):
Right. Yeah, sort of the best of both worlds. And speaking of measures you can take to prepare for these expenses, one thing you very highly recommend is an HSA health savings account. Can you explain the advantages of that kind of account?
Ben Storey (22:08):
Yes, absolutely. So one of the things that we can look at is the HSA, the health savings account. And this is for individuals that have high deductible plans for their health care and they're able to contribute tax-free money. So there's an advantage when you go into this, you're not being taxed on that income that you're actually putting into this type of account, and then it actually grows on a tax-free basis while it's in the account. And then when you take it out, as long as it's used for health care expenses, it comes out. So I sometimes think of this,
Nathan Place (23:01):
I just want to emphasize that for our viewers, this is a big deal. So with an HSA, the money goes in tax-free, it grows tax-free, and it comes out tax-free. That's a pretty incredible advantage over other plans.
Ben Storey (23:13):
Right, I mean, I can't think of another account that is that favorable from a tax standpoint as long as you're using it for the health care expenses. Now, one thing that we tend to see, I mean these plans have become more and more popular. These accounts have become more and more popular. And one of the things, the survey I mentioned earlier, or the report, the 2023 workplace benefits report, one of the things that we highlighted there is this increase in the number of individuals that are using and contributing to these types of plans. But one thing we actually see is people are actually using the money. So the withdrawals are up as well. Now it's certainly designed to be used for health care expenses. However, I think because people have been conditioned from the flexible spending accounts where you had to use the money or you were going to lose it, I mean, you can still roll over a small portion of it at the end of the year that could be applied to following years.
(24:32):
But for the most part, people were conditioned that when this money goes in, you have to use it. The health savings account, just as the name implies, is really powerful when you use it as a savings vehicle. So when you think about the potential expenses, it's estimated that health care expenses for a 65-year-old couple could require about 300,000 in savings. This is an excellent way to save, and one of the things that a lot of people aren't aware of is you can save and then reimburse yourself at any time. So for example, if I saved, let's save for 20 years, and then I decided to go back and reimburse myself for an expense that occurred after I opened the account. As long as I had the receipts and the documentation to do that, I could certainly do that and reimburse myself after I've taken advantage of all that tax-free growth.
Nathan Place (25:40):
And then that's cash that you didn't have a minute ago when you're reimbursed at that point in time.
Ben Storey (25:44):
Right. Otherwise, I think initially the plan should be we we're going to set this money aside and use it further into retirement to cover things like any out-of-pocket expenses that relate to medical, the Part B premiums that we're going to have, and the prescription drug, the Part D premiums, you can use it to cover that. The one thing you're not able to use it for is to cover the premiums for a supplement or Medigap plan. So just something to be aware of. But I would certainly become familiar with the different options here because this is certainly a very powerful planning tool, this type of account, when it comes to health care.
Nathan Place (26:36):
Right. Are there any disadvantages to the HSA that you think people should be aware of, or any caveats or asterisks?
Ben Storey (26:45):
I would say the downside would be if the assets are not going to be used for health care. And sometimes where you see this is is not the type of account unless you're passing it on to a spouse that you want to pass on to other beneficiaries like children, for example, because the advantages that you have when you use the money for health care expenses really apply to the individual and their spouse. If you pass away and leave this to an adult child, for example, the tax consequences aren't as favorable. So just something to be aware of there.
Nathan Place (27:35):
Yeah, yeah, something good to know. Okay. And something else you've recommended is having a designated health care proxy. I doubt everyone knows what that means. Can you explain what that kind of proxy is and why they're important?
Ben Storey (27:50):
So really what's important here is in the event that you were not able to, let's say you're incapacitated, not able to make decisions, you want to complete this form and have this document so that you've designated that individual that can make these decisions, whether that is maybe a spouse, for example, it could be an adult child, it could be a sibling, but you just want to make sure that you have this document in place and also that you're very clear on your wishes in the event that something like being incapacitated occurred so that your wishes are carried out versus the other person is not involved or assigned, or maybe it's just the hospital or the doctor making some of these decisions. Or it could be the courts having to assign a person. So it's better to be prepared and have everything in place before there's an issue, is the way I always like to think about it.
Nathan Place (29:17):
Right, absolutely. And is there a role for the advisor there? Can the financial advisor help to suggest someone or to suggest the idea of having a proxy?
Ben Storey (29:27):
I think suggesting the idea, this should be right along with when we talk about the importance of having a will trust how those can be beneficial in certain situations, making sure that we've designated beneficiaries for retirement accounts, for example. All of these things should be discussed. And the other thing that I would argue is, as we talked about the checklist early on, this should be something that's on that checklist. Maybe you designated somebody but then they've passed away. Maybe it's a sibling that's passed away, for example. You want to make sure you revisit that to make sure that all of those things are in order and that if updates are required, that you're encouraging the client to make those updates.
Nathan Place (30:28):
Yeah. Well, that's a perfect segue into one of our audience questions. I want to leave a few minutes for the questions from all you out there on the internet. Have you or Bank of America created that retiree medical checklist of questions, documentation, and so on? And if so, can you share it with us?
Ben Storey (30:49):
Yes, we do have a checklist that we've created. So we have really three different things that we look at. One is a worksheet to determine approximately what the expenses are going to be. This gives you a ballpark of figure of what the expenses will actually be. Then we've also created a annual checklist that you go through just to make sure as we mentioned, that everything is in order. And then the other checklist that we use is a longevity checklist, and I can certainly provide these to you, Nathan, and to make sure that if an individual wants to view that, that they're able to do so.
Nathan Place (31:47):
Yeah, sure thing. And then also, I presume this is all available at bankofamerica.com?
Ben Storey (31:54):
Yes. A lot of this is online, so if you do a search, you can find these documents as well. That's another way to actually access some of these documents that we've mentioned.
Nathan Place (32:10):
Sure, sure. Alright, great. And let me take a look at some of our other audience questions. Someone asks, are there any limitations to apply HSA funds to long-term care? That's a good question.
Ben Storey (32:26):
So it depends on the individual expense. Just off the top of my head, I can't think of anything specific. It's just that the expense has to cover a medical expense that you're going to have. So there may be some, but I would have to double check just to see some of those limitations. The big one where I see people go wrong is more on the Medicare side where they're trying to cover premium for the supplement or the Medigap plans. But I can certainly take a look and furnish that information to you as well, Nathan, to see if there are any limitations that we need to think about from a long-term care perspective.
Nathan Place (33:30):
Yeah, one example that occurs to me is would you be able to pay for long-term care insurance using the money from a health savings account? Could you pay for the premiums for that from those funds?
Ben Storey (33:43):
I believe you are able to use those for those premiums. So that would be one option. It is something I would certainly verify my level of expertise on the long-term care side is not quite as strong as on the Medicare side, but I'd certainly verify that. But I believe that is a possibility.
Nathan Place (34:08):
Yeah. Yeah. I mean, this is a wide range of topics that we're covering, certainly.
Ben Storey (34:12):
Right, right.
Nathan Place (34:14):
Okay. We've got another HSA question. When somebody dies with HSA amounts left over and leaves it to a non-spouse, does it get treated like an IRA, in parentheses, with the 10 year depletion timeline?
Ben Storey (34:32):
No, it does not. It works differently, but you do have tax consequences when you actually start to distribute the HSA and you don't have that advantage to simply use it for medical expenses and not have the tax consequences or avoid the tax consequences like you would have if it was for the individual or for a spouse.
Nathan Place (35:09):
Right, right. Okay. And looking through these questions, I can see that one of my favorite sources, Ron Mastrogiovanni, is on the line. Hi, Ron, wherever you are! Ron is the head of HealthView Services, and he was an important source for a magazine story that I just wrote about Medicare, and he's asking about the Medicare two-year lookback on income. I guess this is regarding the IRMAA. So we talked about this a little bit. Are there any other points to discuss, do you think that maybe we've left out with regard to that two-year timeframe on the IRMAA surcharge?
Ben Storey (35:46):
So one of the things that sometimes confuses people is the fact that they continue to do that two-year lookback every year. For example, if I've had Medicare, let's say, and for five years, and then for whatever reason my income changes at that point, it could trigger that I'm going to pay the expense for IRMAA. So the thing to just be mindful of is you want to really take into consideration those limits and see if you are approaching them, because even if you go over a dollar, it then pushes you into that higher amount. And so if you can avoid that, it certainly makes sense. One of the other things that I would think about is when you're trying to estimate this figure, be very careful because if you're right at the edge of going into the next threshold and you estimate that you're going to be in the lower threshold, then what can happen is you actually, and if you go over that amount, you'll then receive, or your client would receive a letter basically stating for a certain period of time, you owe X amount of dollars that you failed to pay.
(37:29):
So it can catch them off guard where all of a sudden they receive a letter stating that they have a variety of expenses that they're going to have to, or not a variety, but compounded expenses that they've had over that period of time. So it's very important to think about that. And as I mentioned earlier, if your income does change, the form that Medicare provides and Social Security provides will allow you to provide an estimate. So just something to be aware of.
Nathan Place (38:09):
Right, absolutely. Especially because the difference between being in a lower bracket and being in a higher bracket for that surcharge can be hundreds of thousands of dollars, potentially, over the course of your time in retirement.
Ben Storey (38:23):
Yeah, I mean, and I have some figures here. But to give you an idea, if you look at just the Part B premium, for example, and this is for 2024, it's right at $174.70. Now, that is the base level. Think of it that way. If on the other hand, you're at the highest level or your clients at the highest level, and this would be for a couple, the modified adjusted gross income would be greater than or equal to $750,000, then it goes up to $594, and that's per person. So when you think about that, that is a pretty dramatic increase. One of the other things we didn't talk about, but that I will mention as well, is the other part of the planning that you need to take into consideration is if you have a situation where, let's say you are retiring, but your spouse is also retiring and they're younger. So for example, let's say that I was able to apply and actually receive Medicare. I may have a spouse that's several years younger that is not able to, so then you have to think about the additional expenses that you're going to need to cover until they're eligible for Medicare. So that certainly goes into the planning, and that's part of the checklist as well.
Nathan Place (40:07):
Right, right. Okay. Well, I can see that we're just about out of time. Ben, I'd like to thank you once again so much for your time and for all your insights here today. And thank you so much to our audience for tuning in. Yeah, thank you so much, everybody. This has been a great talk.
