May 2019 Newsletter

Question: What is a yield curve, and what does it mean when it’s inverted?

Answer: In simple terms, the yield curve shows the price of borrowing money in the bond market.

In a “normal” yield curve, long-term yields are higher than short-term yields. This makes sense because the longer someone borrows your money, the more you would expect them to pay you.

The Concept

If you are familiar with annual percentage rates on certificates of deposits, you understand how the time premium works. The interest rate on a five-year CD is almost always higher than the rate on a one-year CD, which is higher than the rate on a 30-day CD. Why?

When you put your money in a CD, you are lending it to a bank. The bank promises to pay your money back, with interest, at the end of the term. You don’t know whether CD rates will move higher or lower over that term, but there’s definitely more uncertainty over five years than there is over 30 days. If you lend the bank your money for five years, you want to get paid enough to compensate yourself for the fact that you might have forgone the opportunity to lend money at a higher rate before those five years are up.

Of course, the opposite scenario could play out, and rates could be lower in the future. That’s why people take the bet–though the interest rates on CDs are typically pretty low compared with riskier instruments, you’ve locked in a guaranteed return (unless you withdraw early and pay a penalty).

The Concept Applied to Bonds

Similarly, when you invest in bonds of longer maturity, you would expect to be compensated more for lending your money for a longer period of time. Look at the two yield curves below–the blue one is from January 2018 and the orange one is from March 2019.

At the beginning of 2018, we had a more typical yield curve. If you follow the blue line, you can see that the yield on the three-month Treasury (1.4%) was appreciably lower than the yield on the 10-year bond (2.5%).

When you follow the orange line, though, you can see that the spread between shorter-term bonds and bonds of longer maturities has shrunk considerably since January 2018. Notably, the curve has dipped negative: The yield on a three-month Treasury (at 2.4%) is higher than the yields on intermediate-term bonds–even 10-year Treasuries are yielding a few basis points less.

What’s Going On?

It’s not so difficult to understand what’s going on at the short end of the curve: This is the part over which the Fed exercises more direct control. At the beginning of 2018, the Fed funds rate was at a range of 1.25%-1.50%. The Federal Reserve has raised rates four times since then–in March (to a range of 1.50%-1.75%); in June (to 1.75%-2.00%); in September (to 2.00%-2.25%); and in December (to 2.25%-2.50%).

What’s going on at the long end of the yield curve gets complicated, though. This is the part of the curve that is more influenced by investors’ expectations, including market sentiment and inflation expectations. The market has been a wild ride in the past few months: After selling off sharply in the fourth quarter of 2018, equities have had a healthy rebound so far in 2019 and have nearly regained their lost ground.

And inflation expectations have slackened a bit, from around 2% at the start of 2018 to 1.8% on March 26, 2019, according to the break-even inflation rate, which compares the yield on nominal Treasuries to the yield on Treasury Inflation-Protected Securities of a similar maturity to estimate the market’s inflation expectations.

Also, importantly, even though the yields on Treasuries might look measly to a U.S. investor, low interest rates on global developed debt is helping to anchor the long end of the curve.

The Current Yield Curve Is Hard to Read

People fear inverted yield curves because they tend to precede recessions.

To say that an inverted yield curve signals an economic slowdown is imminent is an oversimplification. But it does point to a risk in our current financial system: A flatter yield curve can hurt lenders’ profits and stability and their willingness to lend. If long-term and short-term rates are close, markets must be expecting little growth or lenders would demand a bigger time premium.

_{Source: Karen Wallace, CFP®, April 2, 2019}

This article provides insights from my personal experience with phased retirement and that of friends and others, and about what has made retirement work well for us, as well as the results of Society of Actuaries’ (SOA) research on retirement.

Beyond finances: planning the next phase

Since retiring at the end of 2004, I have given significant thought to managing my own retirement while continuing to be an active phased retiree. I have also talked with many other people and conducted round-tables focused on the journey after full-time work.

Many retirement articles focus on how to manage money. This article focuses on a different aspect of managing retirement: managing life beyond money (it assumes that financial management is under control and that there are adequate financial resources).

My personal path has included a combination of contract work, writing and speaking, not-for-profit Board service, research, and a lot of volunteer work, plus spending time building my art and painting skills. I have also talked to a number of others about their own paths and tried to help people think through their retirement journeys.

Many individuals in their 50s, 60s, and 70s are faced with making important decisions about their next steps, sometimes by choice and sometimes not. Some are seeking a new, but similar job opportunity; some are seeking a new active lifestyle but with a different script; and some are seeking traditional retirement. My experience with professional and business people is that most of them are seeking a meaningful set of activities and not just a full-stop retirement, but what that means is very different from person to person.

Based on my experience, discussions with others, and Society of Actuaries’ research, some observations jump out at me:

• While there are well-established ideas about career planning, the ideas about next steps for people at this life stage are much less developed. People feel like they are writing their own scripts without guidance.
• Some people reach transition points unsure about when to make a move, what steps to take, and with no idea about what they will do when they reboot or retire.
• Some people decide to move to next steps without any well-thought-out financial analysis of the implications of beginning retirement or scaling down their income.
• One cannot be on vacation all of the time. Vacation is a break from what we normally do. People who retire with the idea of an endless vacation are likely to be disappointed or bored within a year or two, if not sooner.
• There is a huge variation in the financial situation of people at this life stage. Some have the resources to make choices without being concerned about how much money they will earn in the next few years, whereas others are concerned about continued income and need at least a defined level of earnings if they are to maintain their preferred lifestyle.

This article is not focused on providing ideas that will help retirees earn more money, but rather it is focused on helping people find activities they feel are purposeful within their means.

A diversity of directions and ideas

Often, rebooting means the individual is scaling down somewhat and choosing some form of phased retirement. Sadly, institutional support for flexible job options is scarce. The GAO did a new study in 2017: “Older Workers: Phased Retirement Programs, Although Uncommon, Provide Flexibility for Workers and Employers,” Report-17-536. The GAO interviewed both employers and experts and found few formal phased retirement programs. They presented evidence that many people are working as part of retirement, thus creating their own phased retirement. In 2006, the Pension Protection Act enabled phased retirement, but most employers have not changed their approach much since then.

More generally, though, individuals themselves have very different ideas of what they would like to do as they enter retirement. New directions are often referred to as bridge jobs and encore careers. Ideas include:

• Many want to do some purposeful activity, and some get to the point of transition with a good idea of what to do, but others need to find their next steps after the transition. Those who transition to purposeful activities after full-time work may then transition to total retirement a few years later.
• Some would like to continue working at traditional jobs well into their 70s and some after age 80. Judges, members of Congress, and entrepreneurs (including financial advisors!) tend to work to high ages.
• Others would like to leave traditional full-time roles early and build an independent new role. Corporate employees are much more likely to leave early (and this is often not entirely a voluntary decision).
• Small business owners have different kinds of choices, including transitioning part of the business to someone else.
• Some people are interested in volunteer and not-for-profit roles, working or volunteering in areas that are meaningful to them (but that may involve little or no compensation because the individuals are no longer involved in regular jobs or significantly paid roles).
• Some senior people seek roles on Boards, with a mix of corporate and not-for-profit organizations.
• Some people are interested in consulting but at various levels of effort.
• Some are seriously interested in music or art, maybe in combination with some of the other roles. An interest in art can strictly be a hobby, or the individual might try to sell their artwork, secure roles teaching, etc.

People in senior management or professional roles often want a period of professional activity of their choosing before totally leaving such roles. In discussion with people who had switched roles a few years ago, some were ready for total retirement, and others were thinking about timing. A few never totally leave their professional roots.

The life portfolio

From my perspective, each of us should have a life portfolio as well as a financial portfolio. Just as a financial portfolio requires focus, diversification, and management, so does a life portfolio. However, the strategies that make sense for the life portfolio are very individual, and there are few established tracks for defining and managing a life portfolio.

I have defined four components of the life portfolio, as shown in the figure below:

The couple developing a life portfolio needs to think about which of their goals are shared and which are individual to each of them. Bringing the two sets of goals together, and deciding how to meet individual needs, is a part of the planning process. Many couples may each have a life portfolio, and they can have a joint life portfolio that overlaps the two.

Pursuits

Those who come from professional services roles often engage in a more phased retirement and maintain a wider array of pursuits. Some components of my own pursuits’ portfolio are as follows:

• I view myself as a phased retiree. I have stayed very active professionally, and hope to continue to do so.
• I seek paid consulting assignments consistent with my interests.
• Volunteering in areas that I view as important is a good way to give back, while at the same time doing something that I enjoy.
• Research, writing, and speaking are important to me.
• I am also an artist and have worked to balance a continued actuarial and retirement system focus with making art.
• I place a high value on family commitments and do not get involved in projects that will create difficulty with meeting family priorities. This is a choice that someone with a regular job often can’t make.
• I work regularly to maintain and build contacts.
• I only do projects that are of interest to me, and which I can do on my own without staff. I may partner with others and have others help me.
• Advisory group roles can fit well into what I want to do.
• I am creative and seek to apply that creativity in both professional work and art.
• I want to feel that what I do has value.
• I manage my pursuits to limit the financial outlay I must make to pursue them. At the same time, I do not set priorities based on making money. I avoid overhead but get help with specific targeted tasks. This enables me to focus on what is worthwhile, in a way that limits the use of retirement assets to support the pursuits.

Places

For many people, a big part of the planning process for the life portfolio may relate to places. Just a few of the questions to think about are: Do I want to move to different housing or a different area? Would I like to be a snowbird? How much do I want to travel? Some examples of my thinking and that of some of my friends are as follows:

• Some cities are much more age-friendly than others. It is worth paying attention to this point.
• Access to family and desirable health care are very important to some people. Transportation and services are also important issues.
• I want to stay where I am, at least for part of the year, because:
• I have a lot of friends and contacts there.
• I love the parks, museums, culture, and the city.
• My husband and I have long-term relationships with doctors we really like, and the city has outstanding medical care.
• The climate is great in my home city in summer (but not good in mid-winter).
• I like having a warm weather home and spending part of the year there. I have chosen a place near friends and good activities.
• We have taken many cruises, usually with a small group of friends or family. That offers a great solution when there are people with different interests and levels of mobility in the group. People can do what they want during the day, and everyone can meet for dinner.
• I observe that some travel is physically quite demanding, and it is smart to do things while one can. We may find that some of what we loved to do at one time is no longer feasible as we age.
• Many of the people who travel a lot early in retirement travel much less later.
• Many of my friends who are also snowbirds have downsized their main homes so that while they have more than one place to maintain, they try to simplify.
• Some people choose to completely move to a different area after retirement. Reasons include better climate, less traffic, lower cost, and access to special interests. Some people choose either retirement communities or communities where there are a lot of retirees present.
• Cities, neighborhoods and gated communities often offer access to a wide range of activities, many of which are for seniors or limited to residents. Many of these activities are available at very reasonable cost or no additional cost. This is particularly true of activities organized by volunteers.
• Some of the people who move to a different location after retirement (or who snowbird) may return to the original location when their health fails, because of concerns about health care at the new location.
• There is a wide variety of senior housing that includes a range of services. Discussion of such housing is beyond this article.

People

People are also a very important part of retirement planning and building a life portfolio. I have observed personally and from researching several things:

• When people need help, particularly at high ages, family often steps in. It is not unusual for people to move to be near family, and this can go either way. Seniors may move to be near their children, and adult children may go to be with their parents for a while.
• Decisions about where to live may be made keeping family in mind. Other people make their own decisions and are not concerned about family.
• We bought our snowbird home in a gated community with hotel and resort facilities, as well as private homes. We had friends who lived or vacationed there before we bought the house, and we have appreciated that ever since. We like the fact that people help each other out, and it makes us feel much more comfortable.
• Meeting people and becoming friends is a major challenge in many areas. Big cities can be particularly difficult in that regard.

Health

Maintaining health and having access to good health care are important to people in retirement. The big things to think about are doing things to stay healthy and having access to a good health care system. However, as we age, we need to learn to live with limitations. Getting support is an important part of living with such limitations. Support can come from family, friends, or the market. Marketplace sources of support can be formal or informal.

Building and maintaining the life portfolio

As we age, we often become limited in what we can do. Ideally, the life portfolio has some flexibility to adjust to limitations. Technology can often assist in compensating for some limitations. I believe it is important to include some elements in a life portfolio that can be continued even if one is physically limited or significantly involved in caring for others.

Some people will work on building a life portfolio long before they retire, and others will not start until after they have retired. My view is that it is better to start on this before retirement and to have some pieces of a life portfolio in place, or ready to be put in place quickly.

A friend who is now doing significant volunteer work for the Society of Actuaries observed that getting elected to an SOA Section Council two years before retirement opened up a new world to her and helped her build her portfolio. While I strongly support thinking ahead and building a portfolio over time, it is also important to maintain flexibility and not get committed to too much.

Another friend who is an animal lover balances her interest in retirement issues with volunteering for PAWS Chicago. (PAWS Chicago is a champion for animals, rehabilitating injured and orphaned cats and dogs, providing shelter and adoptions for them, and educating people to make a better world for animals and people.) She has been able to use the skills from her working career in several ways. She does training, helps provide computer support, and helps match cats to families. The training uses her consulting and presentation skills, the computer support uses some of her technical and financial skills, and the matching builds on the skills she had in working with clients and supervising employees.

Implementing the life portfolio:

– Building a brand and using it

It is important to define how you want to be identified, and what you want people to ask you to do, once you are in retirement. Today, many people are aware of the need to build a brand earlier in life, and to use it to manage a career. That need does not go away for a phased retiree. In fact, since there are no well-formed expectations about what a phased retiree might do and how such a person fits in, the need tends to intensify.

For people who have held senior positions or visible roles, there is a choice between being known as “Me, today,” “Me, former chief actuary of XYZ,” or “Me, former president of the Society of Actuaries.” My experience is that preferences vary. I have chosen primarily to be “Me, today,” but the former roles are in my bio.

Part of using your brand is communicating it. After retiring at the end of 2004, I established Anna Rappaport Consulting in 2005. Once I did this, I developed a communication strategy.

– Using technology, website, or social media

Technology has been critical to my life portfolio choices. The professional work I do can be largely done from any location, whether online or by telephone. Access to a good computer and printer is key.

However, one of the things I no longer automatically have access to is “tech support” from my employer. I still need support, and it has been invaluable to find a local person who can come to my house and help when I have a problem or need something set up. An early step in making retirement work can include upgrading technology, including telephones, Internet service, computers, printers, etc. Finding a quiet nook at home to work from—the substitute for the office one used to have—is also important, though many people may already have what amounts to a home office during their working years.

For me, an important part of telling my story has been to have a website. My website was first developed in 2005, and it has been periodically updated. The development work also helped me to define my story better. (The story was also put on a brochure. The brochures were extremely helpful in the first three years to tell people about what I am doing.) Today, social media would probably play a more prominent role in telling the story. Individuals vary with regard to their view of the importance of websites and social media, and what strategy they chose. These issues are a critical part of the implementation of a retirement-pursuits communication strategy today.

Others thinking about this may be interested to know that I used professional help both in formulating the story and in implementing the website, and for me, that help was critical. A former colleague relayed to me that she used her employment exit package at an outplacement firm to plan her next life phase.

– Securing opportunities

Finding opportunities is an important part of meeting one’s goals (and therefore, of implementing the life portfolio). Opportunities most often happen because of seeds that have been planted along the way.

As a phased retiree, I have learned that there are many pro bono roles available, that they can be very gratifying, and that people appreciate good work. It has been much more challenging to get paid consulting work, and more difficult than most people think it will be. The same is likely also true about gaining Board appointments.

For any individual, I believe there is also an issue of deciding what one is professionally qualified to do, can manage and most importantly, what one wants to do. This answer will differ for each individual. I encourage people to be realistic as they think about these trade-offs and constraints. It is also important not to take on so much that it becomes overwhelming.

My strategies for keeping my story in front of people include maintaining contacts, participating in committees, in-person meetings, updating my website, use of social media, and periodic letters to tell people what I am doing. I keep up with people, and when I am traveling, I try to connect with people in that area beyond the meeting I am attending. On a number of occasions, I have organized a dutch-treat dinner with a small group. The dinners have been a great success.

I also mail out update letters, which help me remind people that I am still professionally active, and what my interests are. Every year or two I have sent out a paper letter to more than 200 contacts updating them on what I have been doing. While this seems very old-fashioned, I get many compliments on the letters. Because few people do this today, I think they stand out and help people to remember that I am available and professionally active.

– Measuring life portfolio success

As a phased retiree, my life is very focused on meeting my personal goals. A simple way of deciding if things are working out is to periodically (at least once a year) think about what one has been doing. If you are doing things that you are happy about and proud of, then I would call that a success. On the other hand, if you do not have a story about accomplishments that you feel are worthwhile, then it may be time to rethink your goals and strategies.

Sometimes we get diverted from doing what we want to do because of the care and support needs of family members. From my perspective, that is also important. Part of choosing what to put in my life portfolio (or not) is the ability to change priorities when family and personal circumstances change. This can be a very important part of one’s life portfolio, and family issues can be the biggest commitment for a long or short period.

– Time management

Time management is entirely different than while one is working, but it remains very important. Time management during retirement requires new skills, discipline, the ability to set priorities, and insight into when it is best to say “No.” With regular employment, one usually has a defined structure to the week. As a retiree involved in different activities, every day may be different, and there are still commitments that require adhering to schedules. One has many options about what to do, and it is important to be able to choose and prioritize. It is also important to be able to decide how much time to spend on a project before moving on to the next.

It is valuable to have flexibility in our schedules so that, as we meet new people and encounter different ideas that sound interesting, we have time to test them out and see if they are appealing. One of the advantages of being retired is that we can experiment with going down different roads and seeing what we might find.

– Other observations

I have tried to avoid overhead so that I am not under pressure to earn a minimum consulting income just to support that overhead. I do not have employees or an outside office.

Some support is essential to me, though. That includes a local tech support person who comes to the house, website support, someone who can help with editing and making PowerPoint presentations look professional, and peers who are available to review articles. Family members and friends have been essential to my solutions to these challenges.

In addition to existing contacts, individuals may wish to make new ones tailored to this life stage and emerging interests. There are a variety of organizations that can help people find their next steps, connect to other seniors, or pursue a special interest. The village movement consists of organizations designed to connect seniors to resources and to each other in their own location. Skyline Village in Chicago is an example of such a group. The Transition Network is a national group for women transitioning into their next steps. It has 14 chapters.

Concluding advice

Retirement is a time of transition. At that point, we move away from established long-time obligations, to a period of new activities and new freedom. We have many choices and challenges as we build our own life portfolios.

We might need to build or enhance skills in order to work longer, pursue our passions, realize our goals and do the tasks in our life portfolio. If we are serious about pursuing passions and/or longer work, we should be realistic about building those skills and should be willing to invest time, effort and money in doing so.

There are a number of educational opportunities specifically designed for seniors. The Osher Lifelong Learning Institutes (OLLI) are operated at more than 120 campuses in the United States. Skyline Village helped me realize that there were several good educational opportunities and other resources within a few miles of my Chicago home. There is an OLLI at a local university. The University of Chicago operates the Graham School. A large local church has a Center for Lifelong Learning, and I came to realize that there were good nearby opportunities if I just looked around. Friends in Boston and Washington, D.C. have told me the same thing about their communities. In addition to the local classes, there are also many online classes.

Here are some final tips to share

• Start by understanding your financial situation, and make sure that you have the resources to pursue the path you are interested in. If you need more money before leaving conventional work, try to work longer. Don’t forget about replacing your health care benefits (especially if you are not yet eligible for Medicare).
• The right answers for you are personal. It is important to find your passions and choose activities that create value based on your personal sense of value. Take some time to find your direction, and be prepared to make adjustments over time.
• When you become independent, you can focus on pleasing yourself and not others, and you have your own voice. For some people, having their own voice is very important.
• Keep your spending at a level that lets you make choices. Before spending significant amounts of money, ask the question: What value will this add to my life? A major expenditure may mean limiting your options to reboot or to move to a more interesting, but less lucrative role.
• Take steps to maintain your health. Your vitality, longevity, and effectiveness depend on your physical capability.
• If you are part of a couple, remember that your spouse or partner may pass away. Have a plan that will work for you while you are with the partner, and later on when you are on your own.
• If your long-term employer offers flexible work options, check them out. Some employers are willing to negotiate arrangements that work well for people, and some bring back retirees to do occasional work after retirement. Most people build their own paths, but do not assume there are no options at a long-term employer without doing some checking first.
• Establish your brand and be prepared to communicate it. Do you prefer to be “Me, today” or “Me, former chief actuary of XYZ”? I chose “Me, today.” People I have talked with go both ways, but more are in the “Me, today” camp.
• Think longer-term. You may live to 95 or 100, or more. Some activities are sustainable for a few years only, but others can last longer. I personally like the idea of having a “portfolio of activities,” some of which can be sustained even if you have limitations.
• It is challenging to learn to manage your time when leaving the structure of a job. Work on your time management skills.
• Pay attention to the details. You will need to function without the support structure you were formerly used to. If you are going to do paid consulting, there are practical issues to deal with including technology, how to get work peer-reviewed, contracting, invoicing, protecting intellectual property rights, the possibility of professional liability if something goes wrong, and more.
• Some things require a lot of vitality. Do them now while you can. You never know when limitations are coming.

About the author: Let me introduce myself. I am an actuary, and I am 78 years old. For many years, I have been passionate about improving the retirement system, helping late career individuals decide how to transition from full-time work to life paths that work well for them, and women’s issues. For many years, I have thought about the transition from full-time work to total exit from employment, the steps involved, and the interests of different stakeholders. For 28 years before my retirement, I was a retirement consultant at a major benefits consulting firm. As a retirement benefit consultant, I started focusing on phased retirement and business issues for plan sponsors, but I have now shifted to primarily focusing on the viewpoint of the individual. I have been an active volunteer for the Society of Actuaries (SOA) for 50 years, and have chaired its Committee on Post-Retirement Needs and Risks since its inception about 20 years ago.

_{Source: Anna Rappaport, Apr 12, 2019}

Maintaining adequate health insurance as you transition through the various stages of retirement plays a key role in the retirement decision.

While you are working, you generally have employer-sponsored insurance. Some 58% of people in the U.S. today get their health insurance through an employer, either their own, a spouse’s, or a parent’s, if they are under 26. Employers subsidize the premiums, so employees pay far less than the full cost of the insurance. Premiums for family coverage averaged $19,616 in 2018, according to the Kaiser Family Foundation 2018 Employer Health Benefits Survey, but employees paid just 29% of that, or $5,547 ($462 per month). The subsidy was even greater for single coverage: employees paid just 18% of the $6,896 annual premium, or $1,186 ($99 per month). These are averages, so any person’s situation could be different.

Retirement before age 65

If an individual retires before the Medicare-eligible age of 65, they may have several options:

Retiree insurance. Only 18% of large firms offered retiree insurance in 2018, compared to 66% in 1988, according to the Kaiser survey. Of those that do offer retiree insurance, it’s mainly for early retirees (91%), as opposed to Medicare-eligible retirees (67%). Because of the employer subsidy and quality of the coverage, retiree insurance is usually a good deal for those lucky enough to have access to it.

A spouse’s plan. If the individual loses employer coverage due to retirement, and if their spouse is still working, they may be able to get onto the spouse’s plan. Again, the employer subsidy and quality of the coverage usually make this a good deal. If both retiree insurance and spousal coverage are available, compare the two. Consider premiums, deductibles, co-payments, and coinsurance to determine potential out-of-pocket costs under each plan.

Individual insurance. If employer insurance is not available, they can buy individual insurance on the exchanges. It won’t be cheap. The average unsubsidized premium for a silver plan for a 60-year-old is $1,140 per month. For a gold plan its $1,300.

Once early retirees turn 65, they become eligible for Medicare.

If they have chosen retiree insurance, they will enroll in Medicare Parts A and B at 65. If they can stay on the retiree plan, it will serve as supplemental insurance (plan terms will change now that Medicare becomes the primary payer). If a medical bill is incurred, Medicare will pay first according to its plan limits, and the retiree plan may fill in some of the gaps, such as the deductible and the 20% coinsurance. If the retiree plan also offers creditable prescription drug coverage, they may not need to enroll in Medicare Part D (the plan will let them know if Part D enrollment is necessary) and may get better coverage than Part D plans available on the open market. (But it never hurts to shop around to be sure.)

If a retiree is on a spouse’s plan when they turn 65, and if the spouse is still working, they may remain on the employer plan. If the spousal plan covers 20 or more employees and is a good plan, with an employer subsidy and comprehensive coverage, they do not need to enroll in Medicare at age 65. They can stay on the employer plan and delay enrolling in Medicare until they go off that plan. However, once people turn 65, they can enroll in different parts of Medicare depending on how it rounds out (or replaces) the employer plan.

For example, they can enroll in Part A only, which is free and may offer better hospital coverage than the employer plan. They might even enroll in Part B and pay the $135.50 monthly premium, especially if the plan deductible is rather high. (The Medicare Part B deductible is only $185 in 2019.) Depending on their drug regimen, they might find a Part D drug plan on the open market that beats the employer’s drug coverage. (Note that if they enroll in Part D, they must also enroll in at least Part A.)

Each part should be looked at separately, and the employer plan compared to plans available on the open market. There are two caveats: (1) If the employer plan is paired with an HSA, once they enroll in Medicare, there can be no further HSA contributions. (Note: Because Medicare offers better coverage than the high-deductible plans that are usually paired with HSAs, it may be worth giving up the HSA to get Medicare.) (2) The Part B monthly premium may be more than $135.50 if joint income is over $170,000 and subject to the income-related monthly adjustment amount (IRMAA). Be sure to take these additional costs into account.

If a retiree has individual health insurance when they turn 65, they will be ecstatic to go onto Medicare. They should apply for Parts A and B three months before their 65^th birthday; Medicare will go into effect on the first day of their 65^th birthday month. They should decide whether they want Original Medicare with a Medigap plan and standalone drug plan, or a Medicare Advantage plan; they must do the required shopping in time to enroll in the chosen plan(s) by the first of the month that they turn 65.

Retirement at or after age 65

If an individual is still working when he turns 65, he may stay on the employer plan if it covers 20 or more employees. It is illegal for employers with 20 or more employees to force age-65 employees onto Medicare by offering them a lesser plan than the one offered to younger employees. But now that Medicare is available, each person turning 65 should compare the employer plan to Medicare.

Whereas the employer plan is subsidized by the employer, Medicare is subsidized by the government. In most cases the health care itself—that is, where the individual goes to seek health care services—need not change. What’s different is who pays and how much they pay. Actually, with health care pricing as crazy as it is, no one really knows how much insurance pays. That’s why our focus is on how much the individual pays—that is, how much he will pay out-of-pocket for premiums, deductibles, copayments, coinsurance, and the full cost of noncovered services and drugs.

Note: If an individual is covered by a plan that covers fewer than 20 employees when they turn 65, they should enroll in Medicare. Plans that cover fewer than 20 pay secondary to Medicare, and the individual must be enrolled in Medicare in order for the plan to pay its share. In other words, if Medicare does not pay primary (because the individual is not enrolled in Medicare), the plan may not pay anything at all.

Some of these plans volunteer to pay in the absence of Medicare, but they are not required to do so, and they could back out of that agreement at any time. After enrolling in Medicare, the individual should check with the insurer to see if it offers a plan that can serve as Medicare supplement insurance, then compare that plan to what they can get on the open market.

Before going into the analysis between employer plans and Medicare, the first thing to check is the spouse’s coverage under either option. Is the spouse on the individual’s plan? Does the individual need to stay on the employer plan in order for the spouse to be covered? If the individual goes off the employer plan and onto Medicare, does the spouse have other options, such as their own employer insurance?

The spouse may be able to go onto COBRA for as long as 36 months after the client leaves the plan to go onto Medicare, but this would require the spouse to pay the full, unsubsidized premium. Also, COBRA may not be available to the spouse if the employer plan covers fewer than 20 employees. If the spouse’s only option would be individual insurance under the ACA, those extra costs would need to be factored into the analysis.

Insurance vs. Medicare after 65

Employer insurance is generally considered to be more comprehensive than Medicare, and many people simply assume they will stay on the employer plan after age 65 if they are still working. But it behooves every perdon turning 65 to compare the employer plan to what they can get on the open market with Medicare.

For example, the average employer plan in the Kaiser survey has a cost-sharing premium (i.e., the employee’s share) of $99 per month and a deductible of $1,573. The average copayment is $25 to see a primary care physician and $40 to see a specialist. If outpatient surgery is needed, the average coinsurance rate is 19% and the average copayment is $151. If hospitalization is needed, the average coinsurance rate is 19%; the average copayment is $284 per hospital admission, and the average per diem charge is $327. For prescription drugs the average copayment is $11 for first-tier drugs, $33 for second-tier drugs, $59 for third-tier drugs, and $105 for fourth-tier drugs.

What makes employer insurance hard to analyze is that out-of-pocket costs will depend on how sick an individual is. A healthy person whose plan allows for no-cost screenings and checkups could conceivably pay no more than the monthly premiums—$1,188 per year, on average. At the other extreme might be a serious health event that pushes the person into the plan’s out-of-pocket maximum of $7,350 (the maximum for nongrandfathered plans under the ACA).

Medicare is designed for those with health issues

Medicare, when supplemented with additional insurance, is designed for people to be sick. The monthly premiums are higher, but when an individual is fully covered, out-of-pocket costs are minimal. For $375 per month ($135.50 for Part B, $200 for Medigap Plan F and $40 for a drug plan), or $4,500 a year, pretty much all health care costs are covered, except for the things Medicare doesn’t cover, such as dental, vision, and hearing. It is possible to pay less with a Medicare Advantage plan—some plans have zero premiums but charge copayments or coinsurance if services are utilized. Medicare may cost more if the individual is subject to the IRMAA.

What if the employer plan is an HSA paired with a high-deductible health plan (HDHP)? These plans are definitely designed for healthy people: the premiums are low, and if little or no health care costs are incurred, the money can stay in the HSA to keep growing tax-free. Under IRS rules, HSA contributions cannot be made for a person enrolled in Medicare. This means healthy people who love their HSAs should not enroll in Medicare.

However, once they start any kind of Social Security benefit, they are required to enroll in Part A and HSA contributions must stop. This means everyone age 70 or older—assuming they won’t want to leave Social Security money on the table—may not contribute to an HSA. Individuals who were born before January 2, 1954 and eligible to file a restricted application for spousal benefits when they turn full retirement age may also want to give up their HSAs in exchange for the Social Security income. They can keep the HSA and use it for qualified medical expenses; they just can’t contribute to it after starting Social Security and going onto Medicare.

People who have chosen to stay on their employer plan after age 65 should periodically re-evaluate the plan in light of Medicare availability. Worsening health, or a change in the employer plan, could subject them to hefty coinsurance amounts. They can switch to Medicare at any time after turning 65. They do not need to wait until they leave employment. Each year, when they are presented with their employer plan options, they should also look at Medicare to see how it compares.

Eventually, nearly everyone enrolls in Medicare—unless they keep working forever! As people prepare to retire, they should plan to have their Medicare start when the employer coverage ends so there are no gaps in coverage. This means enrolling in Medicare three months before they want it to start and lining up supplemental insurance and drug plan (or Medicare Advantage plan) so it starts at the same time.

Although terminating employees can take advantage of COBRA to maintain employer coverage for up to 18 months, this is not a good idea. For one, subsidized COBRA premiums are much higher than the government-subsidized Medicare premiums, even when supplemental insurance is added.

Also, the special enrollment period that allows people over 65 to delay enrollment in Medicare ends eight months after leaving employment. Individuals who come off COBRA after 18 months will be outside their special enrollment period and will need to wait until the next general enrollment period (January 1 to March 31) to enroll in Medicare, and coverage won’t start until the following July. HR people who are not aware of these rules often advise terminating employees to go onto COBRA.

Again, consider the spouse. If the spouse has been covered on the individual’s plan, and if the individual retires and goes onto Medicare, the spouse will need to arrange for separate insurance. As noted above, spouses may have their own employer insurance. Or they may be over 65 and eligible for their own Medicare. Or they might go onto COBRA or buy their own health insurance in the marketplace. It’s important to make sure the spouse gets their insurance lined up before their partner retires.

_{Elaine Floyd, CFP®, April 4, 2019}