42 INVESTMENT ADVISOR DECEMBER 2020 | ThinkAdvisor.comyou do because everything’s going to fail.”
As chances are stocks will go up anddown, a client who starts with a conservative mix and grows more aggressive“actually makes the retirement sequencework better.”
3. Dynamic Spending
This method looks at adjusting spend-
ing between upper and lower bands. He
notes the “ratcheting” option is starting
with an example of a 4% withdrawal
rate and moving it up as a portfolio
increases in value. However, spending
shouldn’t be ratcheted up until a port-
folio is “so far ahead that even if the
market pulls back you won’t have to cut
your spending.”
One “super simple strategy” is if there is
a 50% extra cushion of excess returns, take
a 10% increase every three years, Kitces
explains, adding that “this is for clients
who want raises but can’t tolerate cuts.”
Another option: guardrail strategies
that have floor and ceiling bands. When
spending bumps against either band, it
has to be reduced or can be increased.
The bands can be calculated through the
Monte Carlo method.
Kitces also recommended that advisors use official withdrawal policystatements for clients to outline retirement distribution.
RETIREMENT PLANNING
How to Help Newly Retired Clients Avoid Medicare Sticker ShockMost new retirees look forward to the day when they’ll finallyqualify for Medicare coverage. After all, health insurancecosts are one of the most substantial expenses many pre-retirees have to grapple with. Unfortunately, clients quicklylearn that Medicare isn’t quite as “free” as they expected —after they receive a notice telling them how much will bededucted from their monthly Social Security checks.
Premium payments for Medicare Part B are based upon theMedicare recipient’s income, so most retirees assume they’rein the clear once they stop working. Unfortunately, premiumlevels are calculated using a two-year lookback period — andclients are often surprised at the amounts included in the calculation. Clients should be advised that they do have optionsthat can help them avoid the post-retirement Medicare premium sticker shock.
2020 Changes to the Medicare IRMAA Rules
Medicare income-based surcharges, or the income-relatedmonthly adjustment amount (IRMAA), are determined basedon a sliding scale that uses the Medicare recipient’s modifiedadjusted gross income (MAGI). Clients in higher income tiershave higher Medicare premium costs.
Unfortunately, the system bases those IRMAA surchargeson the client’s income from two years ago. That means clientswho retired in 2020 will find that their premium liability isbased on their income levels while fully employed in 2018.
Six tiers of income levels currently exist to determine premium liability for higher-income clients. Beginning in 2018,the rules changed so that starting in 2020, more moderate-income clients now find themselves in the tiers that imposethe highest surcharges.
Under the rules, single clients who fall into the “first tier”with MAGI under $85,000 in 2019 ($170,000 for jointreturns) were not subject to the income-based surcharges andpaid only $135.50 for their monthly Medicare Part B premium.
Conversely, single clients with MAGI of between $160,001
and $500,000 fell into the second highest (“fifth tier”)
income bracket, and clients with MAGI that exceeded
$500,000 (single) or $750,000 (joint returns) paid the high-
est surcharges in the sixth tier.
Importantly, the IRMAA can result in additional Medicare
premium costs that can reach $460.50 per person every month.
Beginning in 2020, those income brackets have beenindexed for inflation for the first time in nearly a decade,meaning that the first-tier income level increased to $86,000.However, most clients in the highest income brackets willnot benefit from indexing until 2028, so these taxpayers willremain in the highest tier despite indexing at lower levels.
What Can Clients Do About IRMAA Surcharges?
Clients who anticipate their income levels to remain relatively
high even during retirement should look into strategies to reduce
MAGI before they become eligible for Medicare. Clients should
take advantage of tax-preferred retirement accounts to reduce
MAGI — contributing to a 401(k) can reduce AGI by at least
$19,500 in 2020 and 2021 (clients age 50 and older can con-
tribute an additional $6,500 in pretax funds to these accounts).
HSAs and Roth IRAs also can provide sources of tax-free
income during retirement. Clients who have reached age 70½
can reduce MAGI by up to $100,000 per year by using their
IRA required minimum distribution to contribute to charity in
a qualified charitable distribution.
For other clients, the solution might be to simply inform
Medicare that their income has dropped substantially for the
year in question. Clients can do this by submitting Form SSA-
44, “Medicare Income-Related Monthly Adjustment Amount
Life-Changing Event” to their Social Security office. Both “work
reduction” and “work stoppage” qualify as life-changing events.
That one simple step can save the client thousands of dollars
in Medicare premiums. However, it’s important for clients to pay
close attention to their taxable income in all future years to avoid
another premium spike. —Robert Bloink and William H. Byrnes
