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Saturday July 17, 2021

The Most Consequential Decision Facing Your Clients – Medicare Advantage versus Medigap

The following is an article by Joanne Giardini-Russell of Giardini Medicare, that appeared in the March 9, 2021, issue of Advisor Perspectives.

 Every year. Every day. I teach clients that they must choose one of two paths to complete their Medicare coverage.

When a person transitions to the Medicare system, there is lots of confusion. Remember that for the first time in 40 years, most are leaving the safety of their employer sponsored group plan and they have to make their own decisions. Those decisions may not be “fixable” at the next open enrollment window for the employer.

 Suddenly, it’s not so simple.

Let’s visit the basics. Here’s the two-second overview of the two choices most people have. In this article I’m not addressing those who have retiree medical coverage available. I’m strictly looking at a person who needs to choose their products for the rest of their life with their own dollars.

Medigap

Medigap follows original Medicare. When you purchase a Medigap plan, original Medicare pays 80%, and the plan you purchase will generally pay “the rest.”

Medigap costs for a 65-year-old are approximately $150.00 per month, every month.

Medicare Advantage

Medicare Advantage is a bundled approach to Medicare. A private carrier creates a plan but must provide at least what original Medicare (Parts A and B) offers. It can add bells and whistles to its plan to attract new participants. These are managed-care plans with networks, co-pays, co-insurance and an out-of-pocket in-network maximum in 2021 of $7,550.

Thousands and thousands of Medicare Advantage plans claim to “cost” zero per month. Yes, zero.

 No tricks!

Guess what – there’s no trick here. As consumers, we’re used to looking under the hood for the problem. What are you hiding? What am I missing? Medicare Advantage versus Medigap is like that. People sit back and ask, “What am I missing that I’m going to get burned by?”

They’re missing nothing. The consumer will sacrifice something by choosing one plan over the other. That’s it.

I know from experience what every single person wants. Ready? They want a Medigap contract that costs zero like Medicare Advantage, and includes dental insurance and over-the-counter perks.

Mic drop.

Every day I help people understand that ain’t gonna happen.

If you choose Medigap, you will generally sacrifice the bells and whistles that Joe Namath is talking about: the free dental, the transportation, the over-the-counter benefits and more. Original Medicare doesn’t cover those things and the Medigap contract will follow original Medicare.

If you choose Medicare Advantage, you may sacrifice the ability to go to any doctor that you want to go to. You may not pay a larger premium, if any premium at all, but remember the old adage, “You get what you pay for?” Will that play out for you in this situation?

Who knows. Who’s got the Magic 8-Ball?

 Pre-existing conditions

That lack of the 8-ball is one of the things that makes a consumer crazy when having to decide between Medigap and Medicare Advantage.

With a Medicare Advantage plan, the monthly cost can be as little as free. If a person is a healthy 65-year-old, takes only atorvastatin (to reduce cholesterol) and goes for an annual physical, this person adores the idea of Medicare Advantage. It’s free. Why should they pay more than free if they don’t use the coverage? They’re using the free gym membership and getting their teeth cleaned bi-annually and telling all of their friends how dumb they are to pay that monthly premium for a Medigap contract.

Suddenly Mr. Healthy needed to have rotator cuff surgery on his shoulder. The surgery was mostly effective, but follow-up care required a lot of physical therapy. PT began costing hundreds of dollars a month for several months. The plan told him after X number of sessions that he was done with PT, and he found himself in the position where his doctor needed to become involved to get more sessions covered by the Medicare Advantage plan.

Yes, I threw the hassle factor into his case but over the year he paid $1,400 out of his pocket that year so it wasn’t so bad.

Ms. Healthy wasn’t so lucky. She had breast cancer 18 years ago. She had a healthy stretch and assumed things would continue. She enrolled in a zero-premium plan when she retired at 68-years old.

Unfortunately, a different cancer struck, and she needed to undergo a fair amount of treatment, nights in the hospital and chemotherapy. She ended up hitting her plan’s maximum out-of-pocket of $5,000 that year.

At the end of that year, the Medicare commercials on TV appeared and Ms. Healthy was confident that she could change her plan to Original Medicare and add a Medigap policy.to get better coverage for her treatments.

 But no one told her that she wouldn’t qualify for the Medigap plan once she’d been diagnosed with the cancer recurrence. Her only option was to go back to Original Medicare and pay the 20% that Medicare doesn’t cover (not a good option) or enroll in the same or a new Medicare Advantage plan in her area.

Don’t assume that you’ll always be able to buy a Medigap contract.

Here’s a great tip and something everyone should know: When people are new to Medicare Part B, they have a special six-month window where their pre-existing conditions do not preclude them from buying a Medigap contract. It is referred to as their own personal open-enrollment window. It occurs when a person is new to Medicare Part B and is over age 65 – those two events together equal your special open enrollment window.

Reality versus television ads

When we’re speaking with new clients, we’re attempting to coach them through conversations so that they can see themselves at age 70, 75, 80 and beyond. It’s important to not just choose your Medicare product for today, as you can see from the situations above.

But it’s so darn hard to do that when your fraternity brother is telling you all of the things that he’s getting for free from his plan. Do you think he’s telling you the 100% truth? We see people constantly that just sort of forget about that two-night hospital stay for $700. No one wants to brag about the downside of their plans, right?

Just take things with a grain of salt when you see Joe Namath on tv or listen to your friends.

 Take the 30,000-foot view

Medicare is easier to digest when you take a top-down approach.

Think about some of these descriptions below of each program. Pretend that money doesn’t matter for a minute and decide which program you’d prefer to be on.

Medicare Advantage

  • They have networks. You’ll be in or out of a network. Stay inside the network for best pricing. Are you okay being, “told what to do?” If you want to go to MD Anderson in Texas and the plan says you can’t, are you okay with that?
  • Should you use the plan, you’ll have co-pays and co-insurances fees. Have a bad year? I’d put away $5,000 for emergencies. Use your $5,000 for the plan’s charges.
  • The plan may require prior authorization. Look to your plan’s evidence of coverage and see how many or what services may require prior authorization. How do you feel about having to obtain that?
  • “My doctor stopped accepting my plan, what do I do now?” It happens and will happen. You’ll have to find a new plan or a new doctor.

Medigap

  • Ask the doctor that you want to see: “Do you accept original Medicare?” (most do). If they say “yes” you are good to go.
  • If Medicare approves a charge (they approve most things), the Medigap plan will pay the rest (generally after the $203.00 annual deductible).
  • That’s it.

Friday September 8, 2017

Annuities, Bonds, and Bad Advice

Recently I was working with a client on analyzing and reallocating his IRA investment portfolio. The portfolio was substantial (over $3M) and was 40% Equities, 40% Bond, and 20% Cash. I really liked this allocation for someone his age (70) and told him that the only real improvements would be using a responsive, tactical investment management platform and to improve his Bond Allocation. The fees on the products and funds he held were already low at an average cost of 1.14%.

In assessing the Bond Allocation, using Morningstar’s X-ray Analysis, we found that over half the total was held in High-Yield or junk bonds. While there is nothing inherently wrong with holding a portion of one’s Fixed Income allocation in High Yield Bonds as a means of diversification and improving the overall yield, a 60% allocation seemed a bit high. Moreover, the total yield on his Fixed Income/Bond allocation was only 3.4%.

I came back to this client with the suggestion of replacing his Fixed Income/Bond Allocation with a combination of Fixed Index Annuities. The criteria I used for my recommendations were that any fees associated with these FIA’s should be comparable to his current annual cost of the Bond Allocation, which was .96%., that any annuity carriers we considered should have a credit rating of A+ or better, and that we could reasonably expect to exceed the current yield of his Bond Portfolio.

Many leading advisors (myself included) view a fixed indexed annuity (FIA) as another fixed income asset and allocate them accordingly:
• An alternative to low yielding bond allocations.
• Allows the investment professional to be as “active” as necessary in other areas of
the wealth management process.
• Provides a range of interest crediting methods with both capped and uncapped
strategies managed by leading investment banks.
• Provides for an ongoing guaranteed income stream for the client and spouse if desired.

The two FIA’s I recommended for this client had internal fees of .95% and .4% respectively, for an average cost of ownership of .675% annually, lower than the current cost of his Bond Funds. The performance of these annuities were tied to underlying diversified stock indices that were managed with volatility controls and had the ability to shift allocations monthly. Disclaimer: Index Annuities are never meant to be a competitor for true equity investments and are not direct investments in the underlying market indices. A reasonable return expectation for this type of product would be between 3½% – 5% over time, with negative index periods earning a 0% return. That’s why they are a viable substitute for bond positions.

This would remove the Market Risk, Credit Risk and Interest Rate Risk associated with his current Bond Allocation, lower the overall annual cost and potentially improve the annual returns. In addition, there is the option of a guaranteed lifetime income that would protect the client (and his spouse) from the risk of extreme longevity. While there are substantial surrender charges in the early years to withdraw more than the annual free amount, Required Distributions from IRA’s are never penalized and that’s all the client anticipated ever withdrawing. Seemed like a no-brainer. Except that it wasn’t.

When we finished with the analysis of the FIA’s, their performance data, reasonable projections, and the financial data on the carriers that offer the products, we scheduled our next meeting for the following week to begin the transfers and implementation of this strategy.

This next meeting is where the process fell apart. Why? Because his (adult) kid heard somewhere that annuities weren’t a good thing to do. While I’m sure that this child is smart, expertise as an elementary school teacher doesn’t qualify one to render complex investment advice. But that’s sometimes how it goes; blood is thicker than 25 years of experience and numerous advanced planning designations. In these situations I just have to let it go or run the risk of insulting the client by impugning the intelligence of their oh- so-smart progeny.

In my opinion, Index Annuities are actually over-hyped and oversold by agents (often posing as fiduciary advisors) as the silver bullet for everything investment related. Cable stations and weekend radio shows are filled with agents dispensing advice about how Index Annuities are the answer to whatever ails you. Market-like returns? Index Annuities! High Growth, No Risk? Index Annuities! Erectile dysfunction? Index Annuities! The only thing more annoying is former TV stars telling people to stockpile gold for the coming financial apocalypse.

Why are annuities so over-hyped? Because they pay commissions. Earning commissions on these products is not inherently wrong or against the best interest of the client, unless the product is not properly positioned and/or sold for the wrong reason – strictly for earning a commission.

But there’s no doubt that annuities can and do solve many of the challenges faced by retirees. The puzzle has been that consumers, and advisors to a large extent, don’t understand where annuities fit or how to use them effectively.

For me there are three primary uses for annuities in my practice – replacing Bonds or Bond Funds with a more efficient alternative in a client’s comprehensive financial plan, filling a defined need for current or future income, or for that client that just can’t stomach any real market risk.

A Wall Street Journal article once referred to income annuities as “super bonds,” which is not the most accurate term. A more appropriate term would be “actuarial bonds.” Extensive research in the field of Retirement Income Planning concludes that income annuities significantly improve retirement outcomes over what is possible with bonds or bond funds.

Unless of course your clients’ kids heard something from somewhere and doesn’t like them.

But for actual research, I suggest the following blogs:
https://retirementresearcher.com/
http://www.theretirementcafe.com/
http://squaredawayblog.bc.edu/

Thursday June 16, 2016

Assessing The Risks in Your Financial Plan

The following is a re-posting of a discussion thread from APViewpoint by Harold Evensky. This defines and assesses the types of Risks associated with one’s Financial Planning and how to address and weight them in importance.  Link: http://www.apviewpoint.com/viewpoint-home

This site is full of information and opinions from thought leaders from across the spectrum of investment and financial planning.

Harold Evensky – 15 Jun 2016 12:46

An interesting and obviously important discussion. Here goes my 2 cents.

There are three risk metrics a planner needs to consider – Risk Need; Risk Capacity and Risk Tolerance. Unfortunately they do not necessarily correlate well with each other. I believe that in designing a policy allocation only two are controlling – Capacity and Tolerance.

Risk Need is the level of risk (i.e., equity allocation) necessary for the client to have a high probability of achieving all of his goals,

Risk Capacity is a measure of the ability of the portfolio to sustain a significant loss and still provide the client with a high probability of achieving his goals.

Risk Tolerance – after many years of thinking about this concept I’ve concluded that there is only one appropriate definition for a practitioner. What is that threshold of emotional pain just before a client will call and say “Harold, I can’t stand it anymore!! Sell me out and take me to cash.” I’m well aware of the objection that determining this “tolerance” is problematical; however, I have no idea how an advisor can make a recommendation for a client without some opinion on this parameter.

The reason I do not believe “Need” is a planning criteria is that if the “Need” requires an equity allocation higher than the client’s Capacity and Tolerance constraints the advisors responsibility is to educate the client on the need to revisit ‘Needs,’ not increase risk. While it may be tempting to acquiesce to a client’s response during a period of positive or stable markets “Well, OK, I guess I can take more risk in order to meet my goals.” When the bottom drops out they will quickly forget their prior willingness and will likely make that “sell me out call.”

Finally, while tolerance is typically the determining factor, on occasion an investor’s Risk Tolerance is significantly higher than their portfolio’s Capacity. In that case, Capacity is the controlling factor.

Thursday September 24, 2015

More Changes to Reverse Mortgages

This is from September 24, 2015, edition of Boston College’s Center for Retirement Research Squared Away Blog:

The federal government continues to work out the kinks in its reverse mortgage program. The latest change allows a non-borrower to remain in her home after her spouse, who signed the reverse mortgage, has died.

The federal government established its reverse mortgage program in the 1990s to provide an alternative source of income for retirees over age 62. These Home Equity Conversion Mortgages (or HECMs) are secured by the equity in borrowers’ houses, and the loans are repaid only when they move or die. The loans are federally insured to ensure that borrowers get all the funds they’re promised, even if the lender fails, and that lenders are repaid, even if the value of the property securing the loan declines.

A June 2015 regulation effectively allows lenders to permit a surviving, non-borrowing spouse to remain in the home, postponing loan repayment until she moves or dies. To qualify, the original reverse mortgage must have been approved by the Federal Housing Administration prior to August 4, 2014 and the property tax and insurance payments must be up to date and other conditions met.

The spousal provision adds to earlier changes, detailed in a 2014 report by the Center for Retirement Research, aimed at improving the HECM program’s fiscal viability while protecting borrowers and lenders. These regulations were a response to riskier homeowners who had tapped their home equity to cope with the Great Recession. The regulations reduced the amount of equity that borrowers could extract upfront and also introduced financial assessments of homeowners to ensure they’re able to pay their taxes and insurance.

Today, the maximum amount allowed for a reverse mortgage is calculated based on the value of the home (up to a $625,000 value), current interest rates, and the borrower’s age. Homeowners generally are limited to borrowing just 60 percent of that personal maximum in the first year of the loan.

When the reverse mortgage closes, borrowers pay an insurance premium equal to 0.5 percent of their house’s value, which can be paid using funds from the loan. They also pay an annual insurance fee of 1.25 percent of the loan amount, in addition to the normal interest charges.

Despite the changes, few people have a reverse mortgage – just 52,757 were approved in 2014. But as more baby boomers reach retirement with insufficient savings, more of them should consider a reverse mortgage as one option for supporting their retirement needs.

Thursday August 20, 2015

The Future of Retirement Is Now

The following is reprinted from the Center for Retirement Research’s August 18, 2015, Squared Away blog:

Gray, small, and distinctly female.

This is what the director of MIT’s AgeLab, Joseph Coughlin, sees when he peers into the future of retirement.

“The context and definition of retirement is changing,” Coughlin said earlier this month at the Retirement Research Consortium meeting, where nearly two dozen researchers also presented their Consortium-funded work on a range of retirement topics. Their research summaries can be found at this link to the Center for Retirement Research, which supports this blog and is a consortium member.

Coughlin spooled out a list of stunning facts to impress on his audience the dramatic impact of rising longevity and graying populations in the developed world, and he urged them to think in fresh ways about retirement. In Japan, for example, adult diapers are outselling baby diapers. China already faces a looming worker shortage, and Germany’s population is in sharp decline. In 2047, there will be more Americans over age 60 than children under 15.

“The country will have the demographics of Florida,” Coughlin said.

The attitudes and comportment of the ballooning population of U.S. retirees – baby boomers – will be more confident and less polite than their parents’ generation, he predicted.

The U.S. labor force is also graying with the aging population. The average age of physicians in this country is already 53, and it’s 49 for nurses, 51 for truck drivers, 56 for financial advisers, and 50 for engineers. In five years, more than one-quarter of the U.S. labor force will be over 55, according to the Stanford Center on Longevity. And an AARP study finds that 40 percent of boomers say they plan to work “until they drop.” But to assume you can keep working, because “you have a master’s or PhD is a joke,” Coughlin warned. “If you don’t stay aggressive about your learning, you’ll fall behind.”

When he says the future is “small,” he means family size is shrinking, with implications for retirees and the elderly. More Americans today than in the 1970s live in a household of one, especially women. In the 1970s, nine out of 10 women had children, but today just eight out of 10 do, he said. This points to a future in which there will be fewer children to care for aging parents. And fewer caregiving spouses: divorce among people over age 50 has also increased dramatically in recent decades.

As the population ages, he sees women, who tend to live longer, becoming more influential, because they already make decisions about retirement and child care. Women, particularly oldest daughters, also do the heavy lifting for parental care.

Older people today are “old but not sick,” but they have multiple chronic conditions, often managed with multiple medications. Aging in the home will be a prime location for the kind of technological innovations Coughlin’s AgeLab specializes in.

He predicted that seniors increasingly will rely on gadgets like implantable sensors to monitor their blood pressure or smart mirrors that detect worrisome changes in their health or gait. He even talked about a $100,000 pop-up house, so mothers-in-law can live (alone?) in their children’s back yard.

The future is here, and Coughlin suggests that everyone “really rethink the contract around what retirement is.”