Pension, healthcare, Medicaid conundrum

[nun]

I retired a year ago at age 53, so I'm now 54. I have ample after tax investments and rental income to cover my expenses and so could keep my annual AGI to around $10k made up of rent after deduction of expenses and dividends.

At age 55 I will be able to take a $20k/year pension and get a cadillac retiree health plan for $100/month. I don't have to start the pension at age 55 and if I defer it will increase by $1330 a year up to a maximum of $33.7k at age 66. Given my low AGI I qualify for Medicaid and my state has very good Medicaid provisions and I would be covered through a private insurer, pay no premiums and keep my current PCP. The retiree health plan has better out of state coverage and will pay for overseas emergencies and I do travel to the UK a lot.

So I have the following choices:

1) Take the pension (it has a 3% COLA) and increase my AGI so I won't qualify for Medicaid and pay the $100/month for the retiree health insurance. I estimate my AGI will be around $30k and after exemptions and deductions the taxable income will be around $18k allowing me to do around $19k of ROTH conversions up to to the 15% tax bracket limit. This will allow me to preserve my after tax investments that are all invested in low cost equity index funds and reduce future RMDs.

2) Defer the pension, keep living off my after tax investments and rental income and use Medicaid. I'll have to keep my AGI below 138% of poverty
level, but this obviously saves $1200/year on health insurance and will give me more guaranteed income later in life, but less after tax money and less chance to convert IRA money to ROTH to reduce RMDs. This option also means I have to deal with the hassle of annual enrollment.

 

[Brat]

Personally I wouldn't choose Medicaid if I could afford other options. Are there any ACA policies that would work for you?

 

[jim584672]

Good points retiree medical:
You don't have to worry about making too much in a year.
Better for travel.
Better doctor network?
Better for Roth conversions.

Good points Medicaid:
Allows a higher pension.
Less expensive, probably lower out of pocket costs.

I would say go with the retiree medical. More flexible.


I have been in contact with an attorney about Medicaid and Roth conversions. My state makes a yearly eligibility determination, so if you are over the limit for a month it won't matter. So my question was how are non-periodic Roth conversions considered. Apparently this is uncharted territory. It might be considered a lump sum payment. If that is the case Medicaid doesn't count it at all. Too early to say how they will treat it at this point.

 

[Chuckanut]

I think the quality of the doctors and other medical care providers is #1. You will have more choices outside of Medicaid if what I have heard is correct.

 

[nun]

I think the quality of the doctors and other medical care providers is #1. You will have more choices outside of Medicaid if what I have heard is correct.

That was an objection when I last talked about Medicaid. I think it really depends on the state. I'm in MA and have a choice of 5 or 6 private insurers on MassHealth, that's the MA Medicaid system. My current PCP takes MassHealth and network hospitals include Mass General and Brigham and Women's and my local hospital. However, being in the plan documentation doesn't tell me how easy and quick it would be to get referrals or specialist treatment.

 

[nun]

Personally I wouldn't choose Medicaid if I could afford other options. Are there any ACA policies that would work for you?

Sure there are plenty of good ACA alternatives. But if I take the pension the retiree health insurance premium is mandatory, they take it out of the pension check and the insurance is better and cheaper than any ACA plan as I get $100 monthly premiums and no deductible or annual out of pocket max for in network care.

If I don't take the pension I would be able to control my AGI to either get free Medicaid or an ACA plan with varying levels of subsidy. I'd probably end up paying $200 to $300 a month for a plan with a $2k deductible.

I think my question is more whether I should take the pension at 55 or defer until 66

 

[pb4uski]

One thing to consider is future taxes once your pension and SS come online. I'm paying for my own health insurance and deferring my pension because I can make much bigger Roth conversions between now and age 70 and avoid or reduce my time in the 25% tax bracket later in life. The benefit of a difference in taxes between the 15% and 25% tax bracket later in life far eclipses to cost of paying for health insurance costs now for us but we are lucky in that we have access to reasonably priced health insurance. So ours is your alternative 2 but with a major twist.

 

[nun]

One thing to consider is future taxes once your pension and SS come online. I'm paying for my own health insurance and deferring my pension because I can make much bigger Roth conversions between now and age 70 and avoid or reduce my time in the 25% tax bracket later in life. The benefit of a difference in taxes between the 15% and 25% tax bracket later in life far eclipses to cost of paying for health insurance costs now for us but we are lucky in that we have access to reasonably priced health insurance. So ours is your alternative 2 but with a major twist.

So you'd advise to defer the pension until 66, so I can do bigger ROTH conversions up to the top of the 15% tax bracket and pay $300 a month for an ACA plan.

 

[pb4uski]

That is what I'm doing but it is very situational so it may or may not be the right answer for you. But if your long term projections show you'll be in the 25% tax bracket once your pension and SS are online it might be better for you in the long run. $3,600 a year for health insurance now might be a lot less than the extra 10% tax later on. YMMV.

I had a VERY complex spreadsheet that compared the alternatives and I selected the one that resulted in the highest age 100 NW.

 

[nun]

That is what I'm doing but it is very situational so it may or may not be the right answer for you. But if your long term projections show you'll be in the 25% tax bracket once your pension and SS are online it might be better for you in the long run. $3,600 a year for health insurance now might be a lot less than the extra 10% tax later on. YMMV.

I had a VERY complex spreadsheet that compared the alternatives and I selected the one that resulted in the highest age 100 NW.

Understood. I have a spreadsheet that is getting more complex in retirement than it ever was when I was w*orking. I really need to apply some linear programming to make the best decision. But I always remind myself that it's good to have these problems.....worrying about optimizing an excess of retirement income is far better than worrying about not having enough. I think I'll run a couple of scenarios through iORP

 

[Katsmeow]

Given your travel, I would probably be more inclined to take the pension early and take the retiree plan.

 

[nun]

Given your travel, I would probably be more inclined to take the pension early and take the retiree plan.

I'm ok for emergencies when I visit the UK as the NHS still covers all emergencies, even for visitors. An ACA plan would cover overseas emergencies, but Medicaid wold not. My current retiree medical would also cover an emergency anywhere in the world and I've also learned that once I reach age 55, and officially retire and get lower premiums, I could get a plan that would cover me 100% anywhere in the world for $179/month and then when Medicare starts I could buy a Medicare advantage plan from my ex-employer for $85/month that would again cover me anywhere in the world. That surprised me as I thought Medicare only worked in the US......but obviously the type of Medicare Advantage plan you buy is important.

Anyway I'm still looking at when I should take the pension. Deferring it doesn't result in any big difference in the cumulative amount that I'll be paid out to my expected life span of 84 years.

 

[MichaelB]

2) Defer the pension, keep living off my after tax investments and rental income and use Medicaid. I'll have to keep my AGI below 138% of poverty
level, but this obviously saves $1200/year on health insurance and will give me more guaranteed income later in life, but less after tax money and less chance to convert IRA money to ROTH to reduce RMDs. This option also means I have to deal with the hassle of annual enrollment.

This option assumes that Medicaid eligibility criteria remain unchanged until you reach age 65 and enroll in Medicare. In addition, Medicaid clawback provisions remain in effect. There is no current intention to apply that to normal Medicaid coverage, but that could change.

 

[nun]

This option assumes that Medicaid eligibility criteria remain unchanged until you reach age 65 and enroll in Medicare. In addition, Medicaid clawback provisions remain in effect. There is no current intention to apply that to normal Medicaid coverage, but that could change.

True. I now remember once thinking that if I was to take Medicaid I'd only do it upto age 55 as that's when the current clawback provisions start. It's a moot point for 2015 anyway as I just got some some part time work and my AGI will be around $34k so I called MassHealth and removed myself from Medicaid. So for 2015 my health care alternatives are to stay on my ex employers deferred retiree cadillac health care (luckily I had not yet cancelled it after qualifying for Medicare) and pay $400/month or get an ACA plan. A Silver ACA plan would save me around $200/month. If I got a Gold or Platinum plan with similar levels of coverage to my current deferred retiree plan it would probably cost a bit more.

I'm definitely trending towards taking the pension at age 55 and getting my premiums reduced to $100/month for the cadillac plan. The only draw back to that is the reduced ROTH conversions.

 

[Alan]

I'm definitely trending towards taking the pension at age 55 and getting my premiums reduced to $100/month for the cadillac plan. The only draw back to that is the reduced ROTH conversions.

FWIW, this is what I would do. No more concerns each year about qualifying for ACA subsidies or Medicaid, or coverage while traveling abroad. So what if you have a little extra in taxes from age 70.5 when RMD's kick in. Relax and go with the flow.

 

[nun]

Here's an interesting coda to my healthcare conundrum. Right now I'm paying the full $450/month premium to keep my deferred retiree health care from my ex-employer. My income was low and qualified me for Medicare, but I got some part time work that will take my AGI over the Medicare limit. However, as I have private insurance I was also told to apply for "Premium Assistance" and this morning received a check from the state for $430. I immediately called the state and asked if this was right went over my circumstances and they said yes it is right....so I get to keep my nice health plan, don't go on Medicaid, don't have to bother with the ACA and the state basically covers the premiums.

 

[jim584672]

Sweet deal.

 

[pb4uski]

Good for you, albeit very odd. Is that a state program I assume?

What would prevent any low income person from getting a private insurance policy and premium assistance?

 

[nun]

Good for you, albeit very odd. Is that a state program I assume? What would prevent any low income person from getting a private insurance policy and premium assistance?

The program is set up to give low income people a subsidy for health insurance they get from an employer, it can't be any private insurer. I was told the the critical factor is that I have retiree health insurance from an ex employer and there are state rules about the premiums on those.

 

[pb4uski]

Ah, I see.

 

[imoldernu]

My guess would be the "bird in the hand" option.
Time to count the blessings, and be happy that the pension is not funded by Chicago.

Here's the latest on the outlook for public employee pensions in the windy city.

City lawyers predict 'catastrophic outcome' if pension reform overturned | Chicago

Chicago faces a $300 million deficit in 2016 with shortfalls continuing “for the forseeable future” — even before piling on $20 billion in pension liabilities that have saddled the city with the “worst credit rating of any major city other than Detroit.”

And if state legislation that saved two of four city employee pension funds is overturned, a “catastrophic outcome” awaits retirees and Chicago taxpayers alike triggered by “further downgrades.”

 

[nun]

My guess would be the "bird in the hand" option.
Time to count the blessings, and be happy that the pension is not funded by Chicago.

Here's the latest on the outlook for public employee pensions in the windy city.

City lawyers predict 'catastrophic outcome' if pension reform overturned | Chicago

Its a real concern, but there was also a lot of hype and scaremongering around public pensions in the wake of 2008. Right now my state pension funding ratio is on the way up. The whole state system (including teachers and local workers) had a 71% at the end of 2013. The separate state workers pension was probably closer to 75% or 80% funded. Market returns and recent pension reforms that changed how benefits are calculated and pushed back the retirement age should see the funding ratio over 80% in the next couple of years. Also 2/3rd of the contributions come directly from state employees wages and the the state has a plan to reach a 100% funding ratio in 2030. So while giving up a chunk of money to any organization to buy an annuity is tough I feel pretty confident in the commitment and ability of my state to meet their obligations. We have a strong union and a democratic legislature which also gives me some confidence.

 

[Chuckanut]

Also 2/3rd of the contributions come directly from state employees wages....

Thanks for mentioning that. It is an often forgotten fact. Part of a pension payment is simply return of the employee's contributions and a return of the earnings on those contributions.

 

[nun]

Thanks for mentioning that. It is an often forgotten fact. Part of a pension payment is simply return of the employee's contributions and a return of the earnings on those contributions.

Yes, the number of public pensions that don't require contributions from the employees is very low today. My state has both a DC and DB plan and you can choose one or the other. When I stared working I chose the DC plan as I wanted the flexibility and the DB plan had a 10 year vesting schedule. The contributions were the same, 11% of salary and the state kicks in 5%. Strangely the state is now allowing people in the DC plan a one time buy opportunity to buy into the DB plan ie to switch horses in mid stream. As I was thinking of using some of my savings to buy an annuity I decided to accept the offer as the state's DB plan is far better than any annuity I could buy on the open market.

 

[Mulligan]

Thanks for mentioning that. It is an often forgotten fact. Part of a pension payment is simply return of the employee's contributions and a return of the earnings on those contributions.

It is still stunning how little that is in the total scheme of things. Very few pension systems I know of have a 14.5% contribution rate of total yearly compensation (which includes health insurance premium) and a 14.5% match like my pension system. Despite the big contributions from both sides, the system is held together by the investment returns. 67 cents of each pension dollar received comes from investment returns, while the other 33 from the contributions.
When government pensions skip their required contributions it is easily seen the compounding damage done to it years down the road.


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