HorrendousHidden

Health Care Costs

January 16, 2020

Keith Knowles, Cortney White and Christopher Pelley

Agenda

I. Problem: Understanding Healthcare Costs

◦ Keith Knowles, EVP Sales and Marketing at Aivante

II. Planning : Maximize Your Company Benefits

◦ Cortney White, RVP Retirement Plan Sales at Transamerica Retirement Solutions

III. Products: Solutions for Peace of Mind

◦ Christopher Pelley, Managing Director Pelley Group

Aivante – Confidential

MEDICAL EXPENSES ARE THE BIGGEST RISK TO RETIREMENT SECURITY

Healthcare costs continue to rise

• Healthcare costs are American’s #1 expense

• Healthcare spending to rise 6.0% per year through 2024*

• Medicare premiums have increased by 7.5% annually from 1966-2019 and are projected to rise 5.17%

annually through 2027

• Treatments are more sophisticated and expensive

• Longevity is rising, so consumers face more years of expense

Shifting burden to consumer

• Employers shifting a greater % of premiums to consumer

• Shift of services from Medicare Part A (hospital, no premiums) to Part B (inpatient, premiums)

• Medicare means testing

Rising healthcare costs are a top concern for retirees

* Centers for Medicare & Medicaid Services

Aivante – Confidential

MOST FINANCIAL PROFESSIONALS ARE ILL-EQUIPPED TO HELP

Most advisors are ignoring this issue.

• They lack knowledge - “What is Medicare means testing?”

• They lack enabling technology – “What are my client’s likely retirement medical expenses?”

• They feel they aren’t paid to advise on this topic – “I get paid to build portfolios” (a commodity)

77% of CPAs cite healthcare costs as a top 3 reason clients stress about outliving

their money. Only 53% cite market fluctuations as a top 3 stress.1

• Yet where do advisors focus the majority of their time?

1: 2018 AICPA Personal Financial Planning Trends Survey

2. 2018 Franklin Templeton Investments Retirement Income Strategies and Expectations (RISE) survey

Aivante – Confidential

TOP-DOWN ESTIMATES DRAMATICALLY UNDERSTATE THE RISK TO RETIREMENT

SECURITY!

1. Fidelity's 2013 "Bridging the Gap to Medicare" survey. 2. Fidelity 2019 Couples Retirement Study. 3. AiVante estimates, couple age 65, assuming Medicare Parts BD, but no Dental, Supplemental or LTC; Man in moderate health lives to 90, woman in good health lives to 95, retire to Pensacola.

$100,000

$285,000

$695,690

$695,690

$470,975

$-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

Consumer

Expectation for

Couple (1)

Fidelity Study for

Couple (2)

Aivante: Man in

Moderate health

lives to 90, Woman

in Good health lives

to 95, Income

<$170k

Prior with Income

$267k to $320k

Lifetime Healthcare Costs for 65 Year Old Couples

Medicare Means Testing Surcharges

Base Medicare Premiumand OOP Expenses

$1,166,665

Aivante – Confidential

MEDICARE MEANS TESTING & RMDS IS A TICKING TIME BOMB…

Medicare means testing means that if you have money, you pay more

• 2019 premiums for highest earners relative to lowest earners are 3.4x more for Part B and 4.6x more for Part D

• From 2007 to 2019, Part B premiums increased 3.1% annually for the base tier, but 5.0% to 8.6% annually for higher income tiers. Part B premiums are projected to grow 5.17% annually from 2020-2027

• Shrinking income brackets will subject more retirees to means testing. Brackets aren’t indexed for inflation and in 2018 a tier fell from $320,000 to $267,000

RMDs can trigger significant means testing

• 50 year-old couple* with $500,000 in tax deferred savings will grow to $3.045 million by age 70, generating an RMD of $111,164

* Couple contributes $38,000 annually to 401ks (with 2% growth in contributions) through

age 66 (no match or catch-up) and earn a 6% annual return.

# See pending Aivante white paper

Aivante – Confidential

…WHICH CREATES SIGNIFICANT PLANNING OPPORTUNITIES

* Couple aged 50 with $500,000 in tax deferred savings who invest $38,000 annually into 401ks (with 2%

growth in contributions) through age 66 and earn a 6% annual return. Couple lives to age 90. Annual

Medicare premium inflation is 5.17%. See pending AiVante white paper

50-year-old couple* would pay

$603,516 in Medicare surcharges

by contributing to Traditional

401ks!

Planning opportunities:

• Prioritize HSA contributions

• Shift 401k contributions to Roth

• Roth conversions

• Asset location that places lower

returning asset classes in tax deferred

accounts

• Insurance products

Planning Strategies for Benefit Plans

◦ 401 (k) Basics - Educate your

employees

◦ ROTH 401(k) – Tax Free for me!

◦ HSA – Maximize sooner than later

What would your

employees say?

Does your company offer a Roth

401(k)?

Most frequent response:

“I’ll have to check”

Howard Pressman CFP, a partner at Egan Berger & Weiner in CNBC interview Nov. 2018

PLANS OFFERED BY SIZE

TYPES OF CONTRIBUTIONS PERMITTED

1-49 PARTICIPANTS

50-99 PARTICIPANTS

200-999 PARTICIPANTS

1,000-4,999 PARTICIPANTS

5,000+ PARTICIPANTS

ALL PLANS

PRE-TAX 92.50% 92.00% 94.10% 96.30% 97.30% 94.40%

AFTER-TAX ROTH 55.60% 61.00% 67.40% 63.30% 68.10% 63.10%

AFTER-TAX 401(M)

10.50% 9.00% 11.90% 13.80% 28.30% 14.60%

NO PARTICIPANT CONTRIBUTIONS

2.30% 2.00% 0.00% 0.90% 0.00% 1.00%

2016 Plan Sponsor Council of America’s annual survey of profit-sharing and 401(k) plans

Roth 401(k)

◦ Plan Participation is low

◦ Only 18.1% of workers across all plans

◦ After-Tax Deferrals are low

◦ Employees earning over $120,000 –defer 4.8% vs. 7% pre-tax

◦ Other employees – 4.3% vs. 6.1%

◦ Contribution Limits are the same as Traditional 401k

◦ $19,500 for 2020 (Over 50 $26,000)

◦ Same match allowed pre-tax

◦ All plan earnings are tax free and withdrawals are tax free (after 59 ½ and plan held for at least 5 years)

◦ May participate in both traditional and Roth

◦ Can be especially advantageous for younger workforce (Educate)

Reduce MAGI

Health Savings

Account -HSA

◦ Triple Tax Advantage

1. Contributions are pre-tax

a. 2020 limits - $3,550 ind. $7,100 family

2. Earnings grow tax free

3. Withdrawals are tax free when used for qualified medical expenses

◦ ADDED BONUS:

◦ No Required Minimum Distributions

◦ Item of Note

◦ If you are in a high deductible health plan, you may open an HSA even if your employer doesn’t offer one

Increase Disposable Income

Target Dated Funds vs.

Custom Designed Portfolio

Products: Solutions

What doesn’t work ?

Dr. Schiller I Presume

Three Bucket Concept

What doesn’t work?

◦ Current Treasury yields for 10-and 30-year bonds – 1.8% and 2.3%

◦ Barrons – “Rethinking Retirement” predicts stocks at less than 4% and bonds at 2% for the next decade

◦ Guggenheim suggests when recession hits - 40-50% market correction

Perceived lack of good investment options?

◦ American Households appear to

not be saving enough

◦ Retirement investors face mental traps

that can endanger long term returns

◦ Standard solution, a heavy allocation

of bonds, NOT ideal

◦ Better investment products combining

participation in the stock market and

guarantee against loss of principal

Barclays QIS Insights – Robert Schiller, Ph.D. March 2019

Funding your LTC:More Flexibility for your future - $250 NPV/LTC

Benefits if you need LTC A benefit if you don’t… If you live too long!

Total LTC Benefits Initial Specified Amount ROP Amount

$ 635,000 $460,000 $175,000

Providing at least 3 years of coverage

Death Benefit paid incomeTax-free to beneficiary

20-year cash value can provide tax-free income

OR OR

Funding your LTC:More Flexibility for your future - $250K NPV

Benefits if you need LTC A benefit if you don’t… If you live too long!

Total LTC Benefits Initial Specified Amount ROP Amount

$ 325,000 $750,000 $404,000

Providing at least 3 years of coverage

Death Benefit paid incomeTax-free to beneficiary

20-year cash value can provide tax-free income

OR OR

JULIE’S STORY

For More Information

Request:

Send – “How Medicare Means Testing Threatens Retirement”

Request a Health Care Cost Analysis – Stress Test

Human Resource Executive Benefit Plan Adjustments

Medicare Evaluation Workshop

Corporate Social Responsibility: Medicare Low Income Program