A prescription for retirementHow health care reform impacts your retirement assets

11639895 RIS32a-02/15

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Affording health care is a top retirement concern

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1. Life & Health Advisor, “Retirement Terrors”, 2014

Three in five Baby Boomers used the word “terrified” to describe their concerns about

paying health care costs in retirement.1

Retirement standard of living in jeopardy

• Health care expenses are on track to consume huge portions of retirement resources.

• Health care is the second largest retirement expense after home mortgage and property taxes.2

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1. Retiring Couples Face $220K in Health Care Costs, Study Says, J. Newsham, bostonglobe.com, June 20142. MainStreet.com, “Is Your House Ready for Retirement? Your Savings May Be Misguided, 2014

Did you know…

The average couple retiring this year can expect to pay $220,000 in health care costs during the course of

their retirement. 1

Medicare plays a central role in U.S. health care• Social insurance program providing health

coverage to individuals

• Primary funding sources: o Payroll tax revenues

o General revenues

o Premiums paid by Medicare recipients

•Valuable source of insurance for:oVirtually all seniors aged 65 and older

oYounger adults with permanent disabilities

•Pre-Medicare, half of all seniors lacked hospital insurance

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Medicare faces challenges• Efficient and effective financing of care for future

generations

• The role of private plans in Medicare

• Concerns about the structure of Medicare prescription drug benefit

• Affordability of health and long-term care in light of rising health care costs

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Source: Shares of total federal spending, 2014, January 2015 catoinstitute.com

The future of entitlement programs is uncertain

Social Security, Medicare,

and Medicaid = 46%

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“We have now just enshrined, as soon as I sign this bill, the core principle that everybody should have some basic security when it comes to their health care.” - Barack Obama

A century of health care reform

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1912 – President Theodore Roosevelt unsuccessfully champions national health insurance.

1935 – President Franklin D. Roosevelt favors national health insurance amid the Great Depression, but pushes his support towards Social Security.

1945 – President Harry Truman calls on Congress to create a national insurance program for those who pay voluntary fees, but is viewed as “socialized medicine.”

1960 –John F. Kennedy makes health care a major campaign issue, but can not pass a plan through Congress as President.

1976 – President Jimmy Carter pushes a mandatory health plan, but an economic recession pushes it aside.

1986 – President Ronald Reagan signs COBRA, a requirement that employers let former workers stay on company health plan for 18 months after leaving a job.

1993 – President Bill Clinton puts first lady Hillary Rodham Clinton in charge of developing a plan that mandates everyone have health insurance, which did not pass the Senate.

2003 – President George W. Bush persuades Congress to add prescription drug coverage to Medicare.

The evolution of health care reform

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2009 – February 24: President Obama announced that he intends to tackle health care reform during his first year in office. September 9: President Obama urged Congress to refocus efforts to pass health care reform. December 24: The Senate approves the Patient Protection and Affordable Care Act.

2010 – February 22: President Obama submits his proposal for health

care reform. March 21: The House passed the Patient Protection and

Affordable Care Act. March 23: The Patient Protection and Affordable Care Act was

signed into law. December 12: Virginia v. Sebelius ruled that the individual

mandate was unconstitutional.

Today’s health care law

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2011– Arguments regarding whether or not the Affordable Care Act an the

individual mandate was constitutional. January 31: Ruled unconstitutional by Judge Roger Vinson.

August 12: Ruled constitutional by the U.S. Court of Appeals for the Eleventh Circuit.November 14: Supreme Court agrees to hear the case in March 2012.

2012 – March 26 – 28: Supreme Court heard oral arguments on the Affordable Care Act. June 28: Supreme Court upholds health care law.

2014-Enrollment open to the public for health care under the new law

Commerce versus tax• The individual mandate was challenged as a

violation of the Commerce Clauseo The authority of Congress to regulate inter-state commerce and

mandate a purchase

• The individual mandate can not be upheld under the Commerce Clause

• Penalty for not purchasing health care insurance ruled a tax that Congress can impose on Americans

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Source: The Washington Post , November 30, 2011

True or False? Health care reform

includes a government-run health care program.

False

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The basis for health care reform• Reduce the federal deficit • Government spending on

Medicare and Medicaid is unsustainable

• Large uninsured population leads to bankruptcy

• High economic cost of fraud

Health care reform overview • Two components to the new health care lawo Patient Protection and Affordable Care Act

o Health Care and Education Reconciliation Act

•Intent is to provide consumers with better control over decisions about health coverage.

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Obtain minimum essential coverage, or pay a penalty• Includes employer provided plans, government programs,

or any plan offered in the individual market

• Penalty is not an insurance premium and provides no coverage

• Annual penalty begins 2014, paid on federal income tax return

• If uninsured for part of the year, 1/12 of annual penalty applies for each uninsured month

• If less than 3 months, no penalty applies

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Source: healthcare.gov, 2014

The fee in 2015 and beyond

• 2015 fees calculated in one of two ways: 1. 2% of household income – Only the amount of income above

the tax filing threshold, $10,000 for an individual, is used to calculate the penalty.

2. $325 per person for the year ($162.50 per child under 18) – The maximum penalty per family using this method is $975.

• Penalty increases every year

• Anticipated for 2016 = 2.5% of income or $695 per person

• Adjusted for inflation after that

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Source: healthcare.gov, 2015

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Since the law’s initial signing in 2010, several provisions have already taken effectExpanded access to coverage for those with a pre-existing medical condition

Investment in disease and illness prevention programs

Elimination of lifetime dollar limits on essential benefits

Free senior preventative care

Online health insurance comparisons Improvements to quality of care

Relief for senior citizens reaching the Medicare “Donut Hole”

Reduction in rate of increase in health care costs for Medicare, Medicaid, and CHIP

Premium rebate program Accountable Care Organizations

Electronic health records Young adults can remain on their parents’ plan until age 26

Funding to improve access to preventative health services

Most tax increases took effect

Pilot program for providers to coordinate patient care

Increased Medicaid payments to primary care doctors

1. The Commonwealth Fund Health Insurance Tracking Survey of Young Adults, 2013 (Chart illustrates the distribution of 15 million adults aged 19-25 who enrolled in or stayed on their parents’ health plans in the past 12 months.

Some good news: More young adults benefit from health coverage1

Distribution of young adults able to enroll in, or remain on, their parents’ health plan

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Source: Kaiser/HRET Survey of Employer Sponsored Health Benefits, 1999-2014, 2014 Annual Survey (*Estimate is statistically different for the previous year shown (p<.05))

Impact #1: Increased financial burden on individuals

1999Single: $2,196Family: $5,791

2014Single: $6,025Family: $16,834

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Health insurance is a requirement. Subsidies exist for some.• Subsidy

• Financial assistance

• Not a loan

• No repayment requirement

• Two subsidies available1:

• Advanced Premium Tax Credit – lowers monthly health insurance premium

• Cost Sharing Reduction – reduces out-of-pocket maximum

• The balance of the premium after subsidy is federally subsidized.

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1. Blue Cross Blue Shield > Buying Health Insurance, bcbs.org, 2014

How income compares to the Poverty Level and family size are the main determinants

• Qualify if earnings up to 4x Poverty Level2

• Approximately $47,000 individual / $97,000 family of four2

• If earnings less that $29,000 individual / $59,000 family of four, may qualify for both subsidies2

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2015 Federal Poverty Level Guidelines1

Family Size

1 2 3 4

100% of Poverty Level

$11,770 $15,930 $20,090 $24,250

133% of Poverty Level

$15,654 $21,187 $26,720 $32,253

400% of Poverty Level

$47,080 $63,720 $80,360 $97,000

1. US Health and Human Services Department, Shows poverty level for the 48 contiguous states and The District of Columbia (excludes Alaska and Hawaii), published in Federal Register on January 22, 2015

2. Blue Cross Blue Shield > Buying Health Insurance, bcbs.org, 2014

FOR REGISTRED REPRESENTATIVE USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC.

Impact #2: Payroll tax or income tax?• Pre health care reform o Employee (and employer) contributed 1.45% per paycheck to

Medicare tax

o Medicare tied to payroll since inception

• Post health care reform1

o Additional 0.9% surtax added to the employee’s portion of the Medicare tax

o New employee contribution = 2.35% per paycheck

o Provision became effective in 2013

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1. Questions and Answers for the Additional Medicare Tax, IRS.gov, 2014

Impact to taxpayers

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Single Taxpayer Joint Return

Earnings Additional HI Tax Earnings Additional HI Tax

$250,000 $450 $250,000 ---

$500,000 $2,700 $500,000 $2,250

$1,000,000 $7,200 $1,000,000 $6,750

$5,000,000 $43,200 $5,000,000 $42,750Provision became effective in 2013

• Additional 0.9% surtax added to the employee’s portion of the Medicare tax

• Targeted at earnings more than:• Married filing joint: $250,000 • Married filing separate: $125,000• Single: $200,000• Head of household (with qualifying person): $200,000• Qualifying widow(er) with dependent child: $$200,000

Medicare tax example

• Imposed on the taxpayer(s), not the employer

• Withheld directly from wages

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Wages exceeding the income threshold

$200,000 ($450,000-$250,000)

Additional HI tax 0.9%Additional impact to taxpayer(s) $1,800

Provision become effective in 2013.

Husband and wife are married and file jointly / Total combined wages of $450,000

Impact #3: Tax on investment income• Imposes a 3.8% surtax on the net investment income of

a taxpayer earning more than $200,000 ($250,000 for a joint tax return)

o Provision became effective in 2013

• Investment income includes:o Interest, dividends, annuities

o Rents, net gain from the sale of a property

o Gross income from a trade or business involving passive activities

• Earned income, distributions from qualified retirement plans and IRAs will not be subject to the tax

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Source: Questions on Net Investment Income Tax, IRS.gov, 2014

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Tax on investment income example

Total income exceeding the threshold $300,000($450,000-$250,000) + $100,000

Wages subject to HI tax $200,000 ($450,000-$250,000)

Additional HI tax 0.9%

Additional HI Impact to taxpayer(s) $1,800

Net investment income subject to Medicare surtax $100,000 (investment income)

Additional Medicare surtax 3.8%

Additional Medicare surtax impact to taxpayer(s) $3,800

Total impact to taxpayer $5,600

Husband and wife are married and file jointly / Combined earnings of $450,000 / Joint net investment income of

$100,000

Provision became effective in 2013.

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Source: Consumer Retirement Income Planning Study, proprietary research conducted by MainStay Investments and Harris Interactive, May 2010.

• Things that were once considered to be luxuries are now more likely to be deemed basic needs.

• Basic needs are now more robust.

• 98% classify health care coverage as a basic need.

• More than half of consumers would rather work longer to pay for health care expenses than give up luxuries in retirement.

Health care is a basic need

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Source: Consumer Retirement Income Planning Study, proprietary research conducted by MainStay Investments and Harris Interactive, May 2010.

Factored in costs into retirement

savings plan

Long-Term Care Insurance

Health FSA/Reimbursement

Account

Health Savings Account (HSA)

Nothing specific, hopefully assets

will cover this

Most are currently

doing nothing specific to save for

health care costs.

Preparing for health care costs in retirement

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Source: Morningstar, September 2014. This chart shows the results of withdrawing different inflation adjusted-amounts each year. The hypothetical example assumes a $500,000 balance and each withdrawal rate is adjusted each year by 4.15% inflation. This hypothetical investment assumes an annual 9.04% rate of return (based on the 50-year average annual return as of 9/30/14, and is comprised of 50% Ibbotson SBBI U.S. large Stock Total Return Index and 50% IA SBBI Long-Term Govt. Bond Total ReturnIndex) in each year that the account does not have losses and does not take into account taxes or any applicable investment fees and expenses. This example is for illustrative purposes only and does not represent the performance of an actual investment. There is no assurance that similar returns will be achieved.

Financial professional challenge #1: Preserving AssetsThe impact of withdrawals

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Probability of a Healthy 65-year-old Living to Various Ages

Source: 2012 IAR Mortality Table

…and making them last longer

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“If I knew I was going to live this long, I would have taken better care of myself.”

- Mickey Mantle

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What can you do?

Prepare for higher taxes

• Balance investment objectives and tax considerations

• Seek investment options that have the potential to enhance after-tax return

o Tax-efficient investments

• Give increased attention to longer-term investments

• Redeploy a portion of assets to investments seeking stability and the potential of downside protection

• Consider retirement income solutions that provide income guarantees

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Thank you.

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