Michael Gerali is a man on a mission.
Michael is one of the authors of the controversial book, “What You Don’t Know About Retirement Will Hurt You!” (published by People Tested Publications, which I have ownership in). He makes the case that the financial planning model that’s been employed for decades, creating as much income (including taxable income) as possible in retirement, may be wrong. The theory is that one’s tax rate would be lower in retirement so having increased income will be more beneficial because of a lower tax burden.
However, with large retirement account balances and required minimum distributions, many retirees aren’t seeing the lowered tax burden — because of their successful investment portfolios.
Gerali warns that the situation has become even more “taxing” because of the current rise of health-care costs in retirement and the “means testing” of Medicare, which is creating an additional tax burden for retirees. He feels that this is a message that needs to reach more investors approaching, or in retirement, as well as financial advisers.
“With means testing for Medicare, it is now possible that a retiree on a fixed income who has defined their budget can find that budget blown to pieces because of investing successfully and seeing their retirement account increase. This increase will raise their RMD, and it will increase their premium payments for Medicare because of means testing,” Gerali says.
Gerali feels that among the things that should be done, is to increase the Roth options in 401(k) plans, or 403b and 457 plans in the case of nonprofit or governmental plans. He sees this as a way that those planning for retirement in the future can continue to save properly for retirement and ensure more tax-free income in the future, which may protect them from “means testing” and increased health-care costs.
In a recent article, Fidelity pointed out that 42% of the 401(k) plans that they administer have a Roth option. This is up from 22% in 2009; but, only 6.6% of participants actually contribute to the Roth account.
The reality is that many advisers and individuals overlook the fact that a portion of your health-care deductions goes away when you retire. Currently, those over the age of 65 can only deduct medical expenses that are above 7.5% of their adjusted gross income (this increases to 10% in 2017). Gerali points out that the use of a Roth account can be an effective way to offset this loss of medical deductions.
“When it comes to Roth 403b and 457 plans, many governments are struggling under the weight of their retiree healthcare obligations and may be forced to cut back or even eliminate this benefit in the future,” says Gerali. “A Roth account is an option these employees can use to assist in funding health-care costs using a tax-free vehicle.”
I’ve written about this in past articles here, but it seems that Gerali and the six other authors of the book may need to increase the volume on this issue as many advisers and investment firms don’t seem to recognize it as an issue.
Those authors feel that part of the problem is that many financial advisers aren’t comfortable discussing health care and the associated issues. Medicare has a lot of moving parts and discussing supplemental plans like Medicare Advantage requires education and licensing.
But if Gerali and the authors of “What You Don’t Know About Retirement Will Hurt You!” have their way, there will be more advisers and investors becoming aware of this in the future.