Art by Scott Bakal

For Steve Vernon, president of Rest-of-Life Communications, the best approach advisers can follow in helping clients think more strategically about their Medicare options starts with initiating a realistic conversation about how their health care needs might change as they age.

“You’ve got to bring the clients’ attention to the importance of these decisions and motivate them to spend time with it,” Vernon said.

Vernon, based in Oxnard, Calif. and one of the authors of the report, “Disconnected: Perception vs. Reality in Retirement Planning,” published this month by Stanford Center on Longevity, sees many retirees struggling to develop a plan that best matches their circumstances. Vernon, who also wrote the book Retirement Gamechangers: Strategies for a Healthy, Financially Secure, and Fulfilling Long Life recommends a three-phase framework to help overcome any hurdles.

Advisers are well-positioned to assist, he said, by first engaging and educating clients about the advantages of finding their ideal Medicare plan. The next phase involves developing a step-by-step guide to evaluate the options. And the final task Vernon identified is to “enable” individuals, as he put it, by helping them implement the decisions by removing any barriers or misconceptions. Frequently, advisers focus on just guiding their clients through phase two, overlooking the importance of the first and third steps, he said.

Sometimes roadblocks are just psychological but could nonetheless prevent someone from acting even when they are motivated and engaged, Vernon said.

“All too often the client has some barrier in their mind like, ‘Oh that will never work for me,’ or ‘My brother told me HSAs are no good,’” Vernon said.

Another challenge many people face is in confronting the reality that there is not one solution that works well for everyone, according to Kevin Smith, a CFP and senior vice president with Wealthspire Advisors.

“It’s going to be very, very client-specific depending on what their healthcare situation looks like and what prescriptions they’re currently taking and what providers they use,” Smith said, urging the need for careful and personalized analysis.

Prudent planning begins with preparing ahead of age 65 given the complexities and intricacies to sort through. Seniors first become eligible when they turn 65 and if they are already collecting social security, are automatically enrolled in Medicare Part A and B beginning on the first day of the month they turn 65.

If they are not automatically enrolled, there is an Initial Enrollment Period which begins on the first day of the month three months prior to their 65th birthday and ends on the last day of the month three months after the 65^th birthday. If an individual does not enroll in Medicare when they first become eligible during the Initial Enrollment Period, they may be required to pay a penalty unless they qualify for an exception. For example, if you have to pay for Part A, you will pay an additional 10% of your premium each month for twice the number of full years you were eligible for Part A but went without coverage. For Part B, for each 12-month period that you are eligible but go without coverage, your premiums will increase by 10%. And that penalty is permanent for as long as you have Part B coverage. (There are also penalties for Part D.)

“That compounds itself over time,” Smith said, who recommends advisers start discussing this with their clients well ahead of that 65^th birthday by collecting granular information about their clients’ particular needs. For advisers, he urges some self-reflection as well. For if they lack the Medicare expertise to analyze the best outcomes, they should consider partnering with a Medicare specialist, he said.

Smith views traditional Medicare as a jigsaw puzzle where you have Part A, which you would typically supplement with a Medigap plan and add a Part D plan which would cover prescription drugs. The other option is the Medicare Advantage Plan, (known formerly as Part C), which is more of an umbrella plan that would incorporate all the health care needs structured like a PPO or HMO with a network of participating health providers typically covering everything from health care to drugs, dental and vision needs.

“This is where it’s really critical to be working with the client and for the client to have very detailed lists of what providers are they currently using and what prescriptions are they currently taking and what pharmacies do they use,” Smith said. “Just changing one or two of those things or if one or two of those things aren’t covered by specific plans you can really end up having much higher out-of-pocket costs.”

In addition, it’s important to review this decision annually to ensure whatever choice the individual first made still suits their current needs, he said.

“It’s crucial not to think of this as just to set it and forget it type of thing,” Smith said. “It’s something you want to keep your eye on and keep reviewing on an annual basis because things will change.”

Vernon also encourages emphasizing the differences between Medicare and employer-based health care plans. In his experience, many people think they understand about Medicare, but when they start looking into it, they discover serious misconceptions. Those might include assuming that Medicare resembles their employer’s health care plan but later are surprised to learn that vision and dental aren’t covered or the cost of hearing aids, as well as some chiropractic and acupuncture care. Medicare also has deductibles and copayments that are typically larger than employer-sponsored plans. Or more fundamentally, some assume Medicare is free, he said. Others don’t adequately weigh the flexibility that traditional Medicare offers in that it provides the freedom to go to any doctor that accepts Medicare reimbursement.

“The advantages of traditional Medicare plus Medicare supplements is that you can choose your own providers, but the disadvantage is it just requires more sophistication on the part of the individual because they’ve got to self-refer,” Vernon said.

Another potential pitfall Vernon warns about are unexpected complications that can occur when people switch between the two options. Medicare Advantage can be simpler in that you’re working within a network, he said. And under Medicare Advantage individuals can move from one provider to another during open enrollment, which offers a lot of flexibility. In addition, if their circumstances change, they can also switch between traditional Medicare and Medicare Advantage. But there can be some instances where someone can get locked out of Medicare supplement plans, Vernon said.

“What people don’t realize is that Medicare supplement plans in some states can have exclusions for pre-existing conditions,” Vernon said, which can be confusing since many people don’t realize the Affordable Care Act did away the pre-existing exclusions, except in the case of Medicare supplement plans.

“The only time you can buy a Medicare supplement plan without worrying about a preexisting condition is when you’re first eligible,” Vernon said. “I call it a trap for the unwary.”

After this assessment and annual review of which type of Medicare option to select, the decision of how to pay for health care becomes a strategic one. While Health Savings Accounts (HSAs) can be used to pay for all eligible medical expenses – including premiums and copays – and could help with monthly expenses, ideally they should be set aside and earmarked for longer-term health care needs.

“When you’re young and you’re contributing to an has, we recommend whenever possible to pay for out-of-pocket expenses outside of the HSA because that leaves more funds inside of the HSA to grow over time,” Smith said.

Vernon sees HSAs as the best savings device for retirement, after matched 401k contributions are met, given they provide federal income tax breaks on contributions along with the ability for earnings to grow tax-free and offer tax-free distributions as long as those distributions are used for qualified expenses.

“If you’re advising a client pre-65 and they haven’t maxed out the HSA the adviser should be screaming at them because it’s tax avoidance, not tax deferral,” Vernon said.

He also encourages advisers to help their clients reserve the HSA balances for long-term care. “Too often people transition in retirement saying, ‘That’s so far away, I’ll just figure it out when it happens,’ and that’s a bad move,” Vernon said. “People don’t think long-term and advisers can really help focus their clients by saying, ‘Did any of your parents or closer family friends need long-term care? What was the heartache and the disruption that caused them?’ Now [that] we’ve got your attention, let’s talk about strategies.”

Even for individuals in their 60s, HSAs can still be regarded as a long-term investment. But should those assets not be sufficient, the other option for paying for long-term care many people have is home equity that can be tapped as a last resort either by selling property or taking out a reverse mortgage, Vernon said. Another possible tool is to purchase a qualified longevity annuity contract (QLAC), he advised. And with younger individuals, advisers would do well to help their clients look ahead and consider simplifying, downsizing, or moving to a more convenient location.

“Don’t wait until it’s too late,” Vernon said. “You can see why these problems get kind of big and hairy and why I like engaging with them sooner rather than later.”