Planning for Health Care? WHAT YOU DON’T KNOW ABOUT RETIREMENT WILL HURT YOU Dan McGrath provides his services as an independent contractor and is not an employee or partner of T. Rowe Price. He developed and is responsible for this content.

2  Build awareness on issues around one of the top financial concerns of retirees and pre-retirees  Healthcare  Review various strategies you may wish to consider for your clients who may benefit from sheltering some of their retirement assets from Medicare means testing Agenda

33 What We Know 76 million baby boomers 10,000 retiring each day

44 What We Know  Health costs are the top financial concern of retirees and pre-retirees — USA Today  Largest wealth sustainability concern: 63% not being able to afford health care and long-term care expenses — Merrill Lynch  Most of baby boomers are concerned about escalating health care costs — AARP

55 What We Know Common Goals of Retirees:  Retire as planned  Decrease in expenses  Accumulate enough assets to maintain lifestyle Source: Wall Street Journal

66 What We Know Common Experiences of Retirees:  Less than 50% retired as planned  Expenses either remained level or increased  88% can’t meet these expenses Source: Wall Street Journal

77 What We Know Why the difference? “Prices for things, such as medical services, home healthcare, and nursing homes, have experienced more inflation than the official consumer price index.” – Wall Street Journal Source: Wall Street Journal

88 The Rules Have Changed Source: Credit Suisse EuroMonitor THE LARGEST COST— HEALTH CARE

99 Who This May Affect Source: Nationwide 97% o f Americans 65 or older who are retired are enrolled in Medicare

10 Who This May Affect Every person has a mandatory expense in retirement

11 What We Know  In order to collect Social Security must enroll into Medicare when eligible  ACA states each person must have coverage  For seniors, there are late enrollment penalties assessed

12 What We Know Less than 8% of Americans have planned for health care costs SIGNIFICANT OPPORTUNITY Source: Nationwide, NPR Family Matters

13 The Rules Have Changed Sources: Medicare.gov, Weiss Ratings, Q1 Medicare.com WHAT ARE THE COSTS OF MEDICARE?

14 The Rules Have Changed Source: Medicare Board of Trustees Report—2015 Department of Health and Human Services 7.85% 5.78% The average rate of inflation The projected rate of inflation

15 Source: Jester Financial Technologies 60-YEAR-OLD HEALTHY COUPLE  Resides in Idaho  Retires at age 66  Earns under the Medicare average  Wants to plan until age 85 CAN EXPECT TO INCUR ROUGHLY: $406,222 Healthcare costs throughout retirement Includes costs associated with Medicare Parts A,B, and D and a MediGap Plan Supplement F Policy The Rules Have Changed

16 The Rules Have Changed  Medicare is means tested (2003 and 2011)  The more one makes, the more one pays  Not about health or medical history Source: Medicare.gov/your-medicare-costs/part-b-costs/part-b-costs.html

17 The Rules Have Changed In retirement, income is:  Your adjusted gross income + any tax-exempt interest, or  Everything on lines 37 and 8b of your 1040 Source: SocialSecurity.gov THERE IS INCOME, AND THEN THERE IS INCOME (IRMAA)

18 The Rules Have Changed EXAMPLES OF INCOME:

19 The Rules Have Changed Source: Medicare.gov MEDICARE IRMAA CURRENT BRACKETS (2016)

20 The Rules Have Changed FOR A 50-YEAR-OLD COUPLE, RETIRING AT AGE 66, THE EXPECTED COSTS, WITH THE INFLATION RATE REMAINING CONSTANT THROUGH AGE 85:

21 The Rules Have Changed Source: Bi-Partisan Policy Center, 2014 Presidential Fiscal Budget, House Ways & Means Committee MEDICARE IRMAA PROPOSED BRACKETS (2017 OR 2018)

22 In Order to Receive Social Security Programs Operations Manual System of SS (1993) Hall versus Sebelius (2012) Court case No Must enroll in Medicare or forfeit all current, future, and past Social Security benefits

23 The Rules Have Changed  Automatic o Part B premiums, late fees, and surcharges due to income  Optional o Part D premiums Source: SocialSecurity.gov BULK OF COSTS DEDUCTED DIRECTLY FROM SOCIAL SECURITY BENEFITS

24 The Rules Have Changed  Social Security deductions: o Part B premiums: must o Part D premiums: may o All surcharges: must  Social Security COLAs: o 2.8% for the foreseeable future  According to Social Security Board of Trustees Report  1.7% in 2015  0% in 2016* (Hold Harmless Act) Source: ssa.gov/OACT/TR/TRassum.html

25 Retiree Who Earned $75,000 on Average While Working

26 Retiree Who Earned $75,000 on Average While Working

27 Retiree Who Earned $75,000 on Average While Working

28 Current Medicare Maximum Income

29 Current Medicare Maximum Income

30 Current Medicare Maximum Income

31 The Rules Have Changed  76 million clients are heading into retirement  Health coverage: the one mandatory expense they all have to have  Less than 8% of Americans attempted to plan for healthcare expenses

32 WHAT IS NOT INCOME: Actionable Considerations

33 Consideration:  Roth 401(k) or Roth 403(b) instead of Traditional Deferred investment  Allows for a conversation with a company’s head of retirement  Opportunity to educate each employee while meeting key compliance requirements Actionable Considerations Accumulated Growth is tax free Medicare does not recognize withdrawals as income Qualified Distributions are tax free

34 Consideration:  Roth conversions to an Annuity  For those older retirees, a Roth conversion to an Annuity may provide ample tax free income to supplement any possible losses to Social Security benefits due to health costs Actionable Considerations Accumulated Growth is tax- deferred Annuities may offer guaranteed income and death benefits Medicare recognizes portion of withdrawal as income

35 Consideration:  Annuity to supplement Social Security Benefits  An annuity can offer an additional source of guaranteed income to supplement Social Security benefits that may be depleting due to Medicare premiums and surcharges Actionable Considerations Accumulated Growth is tax- deferred Annuities may offer guaranteed income and death benefits Medicare recognizes portion of withdrawal as income

36 Consideration:  Certain Life Insurance Plans  Cash value in policy may be used without any tax ramifications  Possibility of also establishing some coverage for Long-Term Care  Mainly for younger clients and prospects Actionable Considerations Cash Value may be tax-free Possibility for LTC coverage Medicare & IRS may not recognize as income

37 Consideration:  401(h) Plans  For small firms or sole proprietorships  Up to $250,000 to invest tax deductible, grows tax deferred and for qualified assets tax free if used for health costs for owner, spouse or any dependent Actionable Considerations Potential for tax free benefits Reimburses for certain expenses May cover expenses for spouse & dependents

38 Have the Conversation A call to action with each and every client as less than 8% of Americans have factored this cost correctly SIGNIFICANT OPPORTUNITY This conversation applies to current clients and prospects, and is a great reason to meet with every one of your clients

THANK YOU. C1X37HV29 1/ US /16 T. Rowe Price Investment Services, Inc.