Boomers who have been the most diligent savers over their careers may be shocked to learn they may be penalized for their efforts.
A new white paper from HealthView Services, a provider of retirement health care data to RIAs, breaks down how Medicare premiums and surcharges are assessed to retirees’ Social Security payments.
Medicare uses Modified Adjusted Gross Income to calculate beneficiaries’ premiums.
MAGI is the sum of almost every source of retiree income, including money earned through work in retirement, Social Security, pensions, distributions from self-directed plans, dividends, earned interest and capital gains.
Once MAGI surpasses $85,000 for an individual, or $170,000 for a couple, Medicare surcharges and premium increases are assessed, and automatically withdrawn from monthly Social Security benefits.
In some cases, the reduced payments could have considerable consequences on retirees’ monthly income.
“These thresholds may seem high, but many retirees, including those on traditional pensions, are already crossing them,” explained Ron Mastrogiovanni, CEO of HealthView Services.
Because Medicare income brackets are not indexed to inflation, overtime, more retirees will be affected, as interest rates rise, potentially resulting in higher retirement income.
“Surcharges will not only impact affluent Americans, but practically everyone with a moderate income,” said Mastrogiovanni.
Those premium increases and surcharges could be significant, according to HealthView’s breakdown of Medicare’s assessments.
When retirees cross the first MAGI threshold, Medicare Part B and D costs increase by about 35 percent.
When the highest threshold is surpassed ($214,000 for individual, $428,000 for a couple), those costs can increase by 200 percent, according to HealthView.
Under the Medicare Modernization Act of 2007, means testing was introduced to address future Medicare liabilities. In 2020, 64 million beneficiaries will be on Medicare, in 2030, 81 million. Today there are about 51 million subscribers.
Health care costs are projected to grow 6 percent annually over the next eight years, according to U.S. Office of the Actuary.
That rate of inflation will almost certainly outstrip Social Security COLA adjustments, the latest of which was less than 2 percent.
Because Medicare is only expected to cover about 50 percent of medical costs, maximizing what Medicare does cover will be key to countering health care inflation.
“Those whose annual income propels them across MAGI thresholds will have to pay significantly more for the same services,” wrote the authors of HealthView’s paper.
But there are measures retirees, and their advisors, can take to lower MAGI assessments.
For starters, Medicare has a two-year “look-back” period, meaning income earned at 63 is used to assess MAGI at 65. The sale of a house before retirement—an often-advised way of reducing costs after leaving the workforce—could generate enough capital gains to surpass a MAGI threshold.
Required minimum distributions after age 70 could also move the needle, and end up increasing monthly Medicare premiums.
The good news is that boomers, and their advisors, may also be able to move the MAGI needle in a favorable direction.
Modifying portfolios with Roth IRAs, HSAs and longevity annuities are ways of protecting and growing assets while assuring income streams—and can all be used to potentially migrate a beneficiary to a lower MAGI bracket, which will allow them to maximize Social Security benefits.
The reality of Medicare means testing, and the complexity of the strategies required to counter it, may bode well for those advisors with expertise in the area.
"Pursing the goal of higher retirement income without consideration of MAGI may move a retiree into a higher surcharge bracket and potentially reduce disposable income," added Mastrogiovanni.
"In one of the case studies in our paper, it would require a 6 percent return on a $400,000 investment over five years, to equal the savings an advisor would be able to attain by simply adjusting their client's investment mix," he said.