Retirement planning, when you really simplify it, comes down to a simple math equation. “How much you have when you retire” minus “how much you will need in retirement.” If that gives you a positive number, you are in great shape. If that number comes out to a negative, well, you can see where that might be a problem.
Despite that, we all know that retirement planning is anything but simple. There are hundreds of variables that contribute to each of those numbers and can change the outcome of that final equation, and it’s important to ensure your math all adds up.
Many of those variables are tough for people to understand, but there’s one variable that goes into that second number, “how much money you need in retirement”, that nearly 75% of people over age 50 wish they understood better: Medicare.
Medicare is a huge factor in that retirement planning equation, and over half of older adults in a recent TIME Money survey didn’t know that it is even a factor at all, specifically not knowing that there’s a cost associated with Part B (which is the part that covers outpatient services like doctor’s visits).
Medicare Part B, like the insurance coverage model most are familiar with, costs $135 a month as a premium for those who are enrolling in 2019 within the lower income bracket ($85,000 for individuals, $170,000 for a couple). For those enrolling who earn more than that, the monthly premium can reach as high as $460.
There’s also an annual deductible of $185. Once you meet that deductible, enrollees typically pay 20% co-insurance for most doctor services, outpatient therapy, and durable medical equipment.
For those who are receiving Social Security benefits, that monthly premium will be deducted from your benefit check before you receive it, so if you had your Social Security benefit dollars into that “what I have” number on the front side of the retirement planning equation, make sure you take that deduction into account.
Another misconception about Medicare that can throw off your calculation is the idea that Medicare will cover long term care. Although rehab expenses are covered, most other long-term care services that we traditionally think of will not be covered.
You might be thinking, “Well yes, but Medicaid does!”, and you would be correct, but you have to meet some pretty stringent asset and income criteria to qualify, so that positive number at the end of your equation has to be down closer to zero than most people are comfortable with.
Now you might be thinking, as nearly half of affluent older adults surveyed also thought, “I’ll outsmart the government, I’ll offload my assets to my kids a little early so that I meet that requirement.” Before you and those 42% of the others that had that thought start patting yourself on the back, there’s a few problems with that.
First, there’s a “look-back” period, where the IRS can look at what you’ve done with your money within the past 5 years, including gifts, or sales made below fair market value. Secondly, when you go on Medicare, not only will you no longer have control of those assets you gave away, you also don’t have control over the care you receive, which can be unsettling for many people.
So, although the simple “what I have” minus “what I need” equation might make you think retirement planning is easy, that’s a costly assumption. There are hundreds of mini equations within each side of that minus sign that can impact your final number. Make sure you and your advisor have a thorough understanding of each one.
This content created by Rick Durkee in conjunction with Fusion Capital Management.