Most individuals haven’t focused on health care in 2016. There’s been minimal media coverage on health care issues compared to what’s been reported in the past, and little news often means that people don’t spend much time thinking about what will be important in the future. That said, the fourth quarter is generally the time of year when health care decisions are made in the workplace. It’s a time when individuals should review what will happen in 2017 and how decisions made now can impact them financially next year.
Health insurance premiums on the rise
Expect health insurance premiums to increase by 5%, according to a recent study by the National Business Group on Health, a Washington D.C.-based organization that represents large employers. Employers indicated that this increase was lower than originally anticipated because of plan design changes that were implemented for next year.
Participants should examine the plan they select with an eye towards determining if the provisions of last year’s plan still meet their needs. Where there is a menu of plans, employees should consider what plan components are critical in choosing the appropriate plan. Regardless of the choice of health plan, participants should expect to pay higher premiums, and factor these increases into expense planning.
More than two-thirds of employers now offer high-deductible health insurance plans. In many cases, this is the only option available and the number of employers offering only high-deductible plans is increasing. Although the premiums in these plans will probably rise as well, these premiums will be lower than traditional health plans and still may make sense to elect even when there is a variety of plan options. Keep in mind that the name “high-deductible health plan” will translate into higher out-of-pocket expenses until insurance kicks in.
For 2017, the minimum deductible is $1,300 for individuals and $2,600 for families. The maximum out-of-pocket costs are $6,550 for individuals and $13,100 for families.
Opening health savings accounts for high-deductible plans
Perhaps the most attractive benefit of a high-deductible plan is the ability to open a health savings account (HSA). From a financial planning perspective, HSAs offer means by which individuals can create a fund that not only pays for unreimbursed medical expenses with pretax dollars, but also accumulates as a source of retirement income in the future.
Unlike the traditional flexible spending account (FSA), contributions to an HSA need not be used during the calendar year and can be left to grow over time—creating a way to accrue additional funds for retirement. Younger plan participants tend to have lower health care costs and can increase their retirement plan savings in a pretax environment. Where an individual can pay out-of-pocket expenses from current income, making tax deductible contributions to an HSA allows funds to grow on a tax-deferred basis until withdrawn. At age 65, when contributions are no longer permitted to an HSA, account owners can use the balances to pay Medicare premiums or other medical expenses.
For 2017, contributions to an HSA are $3,400 for individuals and $6,750 for families. Participants who are age 55 or older may also make a $1,000 catch-up contribution each year. Often, an employer will contribute to an HSA to encourage employee participation.
While assessing the best health care alternatives for 2017, it’s important for individuals to consider the cost of health care in the future. A 65-year-old couple retiring in 2016 will need an estimated $260,000 on average to cover medical expenses throughout retirement, which is up from $245,000 in 2015, Fidelity reports. An additional $130,000 would be necessary to insure against potential long-term care expenses.
How Medicare Part B premiums will look next year
One of the biggest changes coming in 2017 will be the increase in Medicare Part B premiums. Part B premiums cover doctor visits and other outpatient services. These increases, which may be as high as 20% for some beneficiaries, will be based on the 0.3% COLA increase in Social Security for 2017. There was no COLA in 2016, so premiums remained the same ($104.90 for most beneficiaries).
Part B premiums are deducted from those retirees who receive Social Security benefits and Medicare coverage. Generally, any Part B increases are paid out of the increases to Social Security payments as a result of the COLA adjustment. This becomes a problem if there is no COLA or the COLA is too small to cover the higher Part B premiums. Part B premiums for 2017 have yet to be announced, although there have been some estimates put forth by government reports. However, Social Security payments can’t decline from one year to the next, according to federal law.
Consequently, the “hold harmless” rule takes effect. This rule prevents Medicare Part B premium increases on about 70% of the Medicare beneficiaries, those whose modified adjusted gross income (MAGI) is $85,000 or less for a single filer and $170,000 or less for a married couple. While the government does assume responsibility for much of the Part B premiums, 25% of the overall Part B premium expenses must come from beneficiaries.
With 70% of the beneficiaries exempt from these increases, the remaining 30% are assessed the entire increased part of the Part B premiums. The small COLA for 2017 is likely to result in significant premium increases for these beneficiaries, including those who:
- Are newly enrolling for 2017
- Aren’t yet receiving Social Security but are enrolled in Medicare
- Have higher MAGI
Government reports have estimated that this increase could be as high as 22% for these non-hold harmless beneficiaries due to the continued climb of Part B expenses. Last year, Congress lowered the Part B increase from 52% to 16% for this group, so there is that possibility again in 2017.
Health care costs for 2017 will remain an important component of an individual’s financial plan, whether employed or retired, so plan accordingly.
Source: Ellen Breslow, Horsesmouth, LLC. Oct 31, 2016
The cost of living varies significantly across the country making it essential to be a savvy shopper and saver — wherever you call home.
You know that $25,000 car you’ve had your eye on? In just 10 years, it could cost almost $34,000, assuming prices rise by a mere 3% per year. That’s the reality of inflation, which is commonly understood as the increase in the price of any product or service.
While the consumer price index (CPI), which is based on a monthly survey by the U.S. Bureau of Labor Statistics, serves as the standard measure of inflation nationwide, prices on all sorts of goods and services — from a gallon of gasoline to a house — can vary widely by region, state, and even within states.
Such variations are captured by Regional Price Parities (RPPs), which measure the differences in the price levels of goods and services across states and metropolitan areas for a given year.1 RPPs are expressed as a percentage of the overall national price level (gleaned from the CPI) equal to 100.2
For instance, if an area’s RPP is greater than 100, it means that goods and services are more expensive than the national average; if an area’s RPP is less than 100, goods and services are less expensive than the national average.2
In July the Bureau of Economic Analysis published RPPs for 2014. The data showed that the District of Columbia’s RPP at 118.1 was greater than that of any state. States with the highest RPPs — and lowest “real value” of a dollar — were Hawaii (116.8), New York (115.7), New Jersey (114.5), and California (112.4).1 States with the lowest RPPs — hence, the biggest bang for your buck — were Mississippi (86.7), Arkansas (87.5), Alabama (87.8), South Dakota (88.0), and Kentucky (88.7).1
How do these price differences play out in real dollars and cents? The same gallon of regular gas that costs $2.74 in Hawaii might run you $1.82 in South Carolina.3 Or, viewed another way, if you had $100 to spend at a store offering a range of goods at national-average prices, in Hawaii, that $100 would feel more like $85.60, while in Mississippi the national-average $100 would be more like $115.30.3
The Bureau of Labor Statistics asserts that in areas where goods and services are more expensive, wages tend to follow suit — but that is not always the case.2
Be a savvy shopper — wherever you live
Regardless of where you live, consider some simple dollar-stretching tips.
- Cut back on nickel-and-dime items. You might be surprised at how much you can save by reducing out-of-pocket expenses. Instead of indulging on a “designer” cup of coffee, purchase a regular coffee. The amount saved can add up fast.
- Save on books, music, and movies. Visit your neighborhood library to check out books and music instead of purchasing your own.
- Brown bag meals. Work days can be hectic, but instead of buying breakfast or lunch out, carry it in. If you spend $8 per day on lunch, you could free up $160 per month for your long-term financial goals.
- Seek travel values. By traveling off-season or during the shoulder season — the periods just before or after the peak tourist season — you can receive discounted rates on lodging and airfares, which can cut your vacation expenses.
- Practice energy efficiency. By turning the thermostat back in winter while you’re at work or sleeping, you can save on your heating bills. Same for the air conditioner in hot summer months.
- Be creative. Can’t imagine skipping your daily trip to the vending machine? Don’t fret. The main point is to look for effective ways to stretch a dollar — and then do it. Over time, you might find that a little savings can make a big difference when it comes to funding your bigger ticket financial goals.
1The Bureau of Economic Analysis, news release, “Real Personal Income for States and Metropolitan Areas, 2014,” July 7, 2016.
2The Bureau of Labor Statistics, Monthly Labor Review, “Purchasing power: using wage statistics with regional price parities to create a standard for comparing wages across U.S. areas,” April 2016.
3The New York Times, “What $100 Can Buy State by State,” August 8, 2016.
There are few tasks in life that Americans avoid as much as they do a household budget. But you need one, in particular when it comes to your golden years.
According to recent economic and personal finance surveys, only one-third of Americans keep a detailed written or computerized monthly budget. People were more likely to have a plan if they had a college degree (38%) or if they made more than $75,000 a year (43%).
As financial planners, we always assert that a budget is important, but in retirement—when people are living on fixed income for the rest of their lives—it is critical. For one thing, people are living longer and many are in real danger of running out of money in retirement.
“When we’re putting together retirement plans, we need our clients to have a good idea of what their retirement vision will look like,” says Jennifer Landon of Journey Financial Services. “Because, if we have someone who believes they will be OK on $60,000 a year, and we build a retirement plan around that, then they retire and find out they can’t live on $60,000, but need $80,000, it would put a lot of strain on that retirement.”
“Basing (the retirement plan) on inaccurate information could put people in a situation where they could run out of money quickly,” she adds.
Landon says the industry sometimes uses a rule of thumb to get an idea of what retirees need to live—80% of preretirement income. But, she says, that is not always the case.
“Some need just as much money when they retire and others need more,” she says. “You have more time to travel and more time for those types of activities that require more money.”
David Fleisher of Firstrust Financial Resources says having a budget is so important in retirement “because every day will feel like a Saturday. There is more time to travel, eat out, and enjoy the fruits of your labor.”
“Because of people living longer, it’s a marathon and not a sprint,” he says. “People have a list of things they want to do, travel and other adventures, especially in the earlier and presumably more active years in retirement.”
Fleisher says financial security in retirement is not based on the size of your nest egg, nor the amount you spend. “People often ask, ‘I have X dollars saved up, will I be OK?’” he says. “But what’s important is the relationship between the nest egg and the amount individuals spend.”
He says it’s also important to have a balance of guaranteed income streams, like pensions, annuity payouts, and Social Security, along with the traditional investments, and liquid cash savings.
“You must have a balance,” he says. “You need a guaranteed income stream because it is predictable and easy to budget against. Traditional investments have a greater growth potential to help keep pace with inflation.”
Catherine Collinson of the Transamerica Center for Retirement Studies says one of the things that is so alarming is that retirees are, for the most part, living on very limited income and don’t have a lot of savings.
“They are doing well,” she says. “However, it looks like they are unprepared for a major financial shock like a medical emergency, hospitalization, or the need for long-term care. Those things could wipe out a nest egg. That speaks to the importance of having a budget and continuing to save for retirement even though you are already in retirement.”
“It gives you a better path to run on,” she adds. “The other thing a budget provides people is a sense of control. It’s easier to feel you have control if you know how much money is being allocated. You don’t have to focus on the bottom line if you know what your needs are and you can enjoy the journey a little bit more.”
As one of the many components of our financial planning process, Capital Advantage offers budgeting worksheets that we aim to review with you at least annually. We understand that your plans (and budgets!) can sometimes feel like constantly moving targets, but we are here to help you move right along with them, updating your plan as changes arise. If you have not yet started on your financial plan, or would like a copy of one of our complimentary budget worksheets, please contact us so you can get started today.
Source: Rodney Brooks, Horsesmouth, LLC. November 4, 2016