MONEY Medicare

Some Medicare Advantage Plans Have Hidden Risks—Here’s How to Avoid Them

hands using measuring tape
Nils Kahle

Although they promise quality care at lower cost, some Medicare Advantage plans fall short. Before you enroll, here are key questions to ask.

Seniors have flocked to Medicare Advantage in recent years, attracted by savings on premiums and the convenience of one-stop shopping. But as the annual Medicare enrollment season began this week, a memorandum from federal officials to plan providers surfaced that serves as a big red warning flag.

The upshot: Assess the quality of any Advantage plan before you sign up.

The memorandum, first reported by the New York Times, described ongoing compliance problems uncovered in federal audits of Advantage and prescription drug plans. These include inadequate rationales for denial of coverage, failure to consider clinical information from doctors and failure to notify patients of their rights to appeal decisions. The audits also uncovered problems with inappropriate rejection of prescription drug claims.

Advantage is a managed care alternative to traditional fee-for-service Medicare. It rolls together coverage for hospitalization, outpatient services and, usually, prescription drugs. Advantage plans also cap your out-of-pocket expenses, making Medigap supplemental plans unnecessary.

The savings can be substantial. Medigap plan premiums can cost $200 monthly or more, and stand-alone drug plans will average $39 a month next year. Enrollees have been voting with their wallets: 30% are in Advantage plans this year, up from 13% in 2005, according to the Henry J. Kaiser Family Foundation.

Advantage plans are subject to strict rules and regulations, and must cover all services offered in original Medicare, with the exception of hospice services. Some offer extra coverage, such as vision, hearing, dental and wellness programs.

And there is evidence that the quality of these plans is rising. Medicare uses a five-star rating system to grade plan quality, and plans can earn bonus payments based on their ratings. Average enrollment-weighted star ratings increased to 3.92 for 2015, from 3.86 in 2013 and 3.71 in 2013, according to Avalere Health, an industry research and consulting firm. Avalere projects that 60% of Advantage enrollment will be in four- or five-star plans next year, up from 52% this year.

But the Medicare memorandum focuses on problems outside the rating system. “It’s about basic blocking and tackling and whether a plan adheres to the program’s technical specs,” says Dan Mendelson, Avalere’s chief executive officer. “These are the basic functions that every plan should be able to handle.”

Nevertheless, consumer advocates say they deal with these compliance problems regularly, and more often with enrollees in Advantage than in traditional Medicare.

“The most typical problems have to do with plans that are making it difficult or impossible for people to get their medications,” says Jocelyn Watrous, an advocate for patients at the Center for Medicare Advocacy. “They impose prior authorizations or other utilization management rules that they make up out of whole cloth.”

Consumer advocates urge Medicare enrollees to restrict their shopping this fall to four- and five-rated plans, of which plenty are available in most parts of the country. “If a plan consistently gets four or five stars, all other things being equal it will be a high performer,” says Joe Baker, president of the Medicare Rights Center.

Few Medicare enrollees roll up their sleeves to shop, however. A study by Kaiser found that, on average, just 13% of enrollees voluntarily switched their Advantage or drug plans over four recent enrollment periods. And focus groups with seniors conducted by the foundation last May found that few pay attention to the star ratings.

“Seniors said they don’t use the ratings because they don’t feel they reflect their experiences with plans,” said Gretchen Jacobson, associate director of the foundation’s Medicare program. “Even when we told them that their plan only has two stars, many just wanted to stay in that plan.”

Advocates say the star ratings are just a starting point for smart shoppers.

They say you should check to make sure health providers you want to see are in a plan’s network. You should also consider how you would react if any of those providers disappeared during the 12 months that you are locked into the plan. Advantage plans can—and do—drop providers. UnitedHealth Group, the industry’s largest player, made headlines last year when it dropped thousands of doctors in 10 states. Advantage plans in Florida, Pennsylvania, California and Delaware also terminated provider relationships.

Also be sure to examine the prescription drug “formularies” in your plan—the rules under which your medications are covered. And talk with your doctors about any plan you are considering, especially if you see specialists for a chronic condition.

The Medicare memorandum to plans also underscores the importance of appealing denied claims, Baker says. “Appeal, appeal, appeal—it’s like ‘location, location, location’ in real estate.”

MONEY Medicare

One Simple Way for Retirees to Save on Prescription Drugs

Hand picking one pill out of a row of pills
If you don't shop around for a drug plan, you may be leaving money on the table. Julie Toy—Getty Images

Just over one in 10 seniors decide to switch Medicare drug plans during fall open enrollment. But nearly half of those who do save money. Here's how to shop for the best deal.

Your Medicare prescription drug plan sent you a letter recently. Chances are, you didn’t read it—and that could be costing you money.

Health insurance companies must send an annual notice of changes for the coming year to Part D prescription drug and Part C Medicare Advantage plans. The notice, which must be delivered to you by Sept. 30 each year, details changes in premiums and co-pays, and lets you know whether your medication will be covered in the year ahead.

The notice comes just before the annual plan enrollment period, which kicks off on Oct. 15 and runs until Dec. 7. It’s your signal that it’s time to re-shop your coverage.

But a study released last fall by the Henry J. Kaiser Family Foundation found that, on average, just 13% of enrollees voluntarily switched their drug plans over four recent enrollment periods. The switching rate is nearly identical for those in Medicare Advantage plans, the all-in-one managed-care option offered to Medicare beneficiaries.

That’s unfortunate, since plenty of people are leaving money on the table. The Kaiser study found that 46% of plan switchers saved at least 5% the following year, mainly on premiums.

Seniors who use traditional fee-for-service Medicare need only check on their drug coverage. Most Medicare Advantage plans wrap in drug coverage, so enrollees can usually make a single shopping trip there, too.

Medicare cost inflation has been moderate for several years, and should remain so in 2015. The average Part D premium will drop from $39.88 in 2014 to $38.95 next year, according to Avalere Health, a research and consulting firm.

But a close look at the 10 most popular plans shows why it is important to evaluate coverage annually. Premium changes will vary significantly. For example, average premiums for Aetna’s Medicare Rx Saver plan will fall 31%, while WellCare’s Classic plan will jump 52%, on average.

Plenty of low-cost options are available. Five of the top plans will have premiums under $30, led by Humana/Walmart Rx, which will have an average premium of $15.67.

“It’s an ongoing pricing game,” says Dan Mendelson, Avalere’s chief executive officer. “The plans always try to price as low as possible and below the market and then they are forced to increase premiums. It means that now, more than ever, people need to go out and shop and take a careful look at what they are paying.”

Premiums aren’t the only factor to consider. Fewer drug plans will have zero deductibles next year, Avalere reports. It’s also important to make sure the drugs you take are covered—and under what circumstances.

In many cases, the best deals will be offered by plans using preferred pharmacy networks, so make sure the pharmacy option is convenient for you, because drugs will be more expensive if you use non-preferred delivery options.

Finally, pay attention to how your drugs will be covered if you enter the “doughnut hole,” the coverage gap that begins after you and your drug plan have spent a certain amount for covered drugs. Most plans don’t include gap coverage, and those that do charge higher premiums. But the size of the gap is being shrunk under a provision of the Affordable Care Act, and is scheduled to disappear in 2020.

Next year the gap starts at $2,960 (up from $2,850 this year) and ends after you’ve spent $4,700 (up from $4,550 this year).

Seniors who enter the gap also get discounts on brand-name and generic drugs, and those breaks will be larger next year. Enrollees will pay 45% of the cost of brand-name drugs in 2015 (down from 47.5% this year) and 65 percent of the cost of generic drugs (down from 72% this year).

How to get help

Use the online Medicare Plan Finder tool to find plans that match your needs. You also can call Medicare (1-800-Medicare) for assistance with plan selection.

“If you’re not comfortable going online, they can review your medications and match up plans with you,” says Frederic Riccardi, director of client services for the Medicare Rights Center, a nonprofit advocacy group.

Riccardi advises people to purchase plans through Medicare, rather than going directly to the plan providers. “It creates an administrative record at Medicare of what you wanted to do, in case of any problems with your enrollment.”

Free one-on-one help is available from your local State Health Insurance Assistance Program (SHIP), a network of non-profit Medicare counseling services.

The Medicare Rights Center also offers free counseling by phone (1-800-333-4114).

MONEY Social Security

How Student Loans Are Jeopardizing Seniors’ Retirements

Senior overwhelmed with debt
Chris Fertnig—Getty Images

Old debts are haunting retirees, as the federal government goes after their Social Security checks for repayment.

It’s a rude awakening for a growing number of seniors: They file for Social Security, then discover that the federal government plans to take part of their benefit to pay off delinquent student loans, tax bills, child support or alimony.

This month the U.S. Government Accountability Office (GAO) released findings on the problem of rising student debt burdens among retirees—and how the government goes after delinquent borrowers by going after wages, tax refunds and Social Security checks.

Under federal law, benefits can be attached and seized to pay child support and alimony obligations, collection of overdue federal taxes and court-ordered restitution to victims of crimes. Benefits also can be attached for any federal non-tax debt, including student loans.

It seems the student loan crisis isn’t just for young people. The GAO found that 706,000 of households headed by those aged 65 or older have outstanding student debts. That’s just 3% of all households, but the debt they hold has ballooned from $2.8 billion in 2005 to about $18.2 billion last year. Some 27% of those loans are in default.

If you’re among the 191,000 households that GAO estimates have defaulted, your Social Security benefits can be attached and seized.

“When that happens, the federal government pays off the creditor, and now it’s a debt to the federal government,” says Avram L. Sacks, an attorney who specializes in Social Security law. “So they can go after you for the loans—and now that students are reaching retirement age, long-forgotten debts are coming back to haunt them.”

The amounts that can be seized are limited, and the maximum amounts vary. In the case of any federal non-tax debt, including student loan debt, the government can take up to 15% of your monthly Social Security check. That’s a painful bite for low-income seniors living primarily on their benefits.

The law prohibits any attachment due to a federal non-tax debt that reduces a monthly benefit below $750. (Federal tax debt is not subject to this limitation.) Retirement and disability checks can be attached, but Supplemental Security Income—a program of benefits for low-income people administered by the Social Security Administration—is exempt.

In alimony or child support situations, garnishment is limited to the lesser of whatever maximums are set by states or the federal limit. The federal limits vary from 50% to 65% depending on how much the debt is in arrears and on whether the debtor is supporting a spouse or child. In victim restitution cases, the limit is 25% of the benefit.

Benefits can be deducted through an “administrative offset” against the amount the government sends you or through garnishment. In the case of garnishment, banks are required to protect the two most recent months of benefits that have been paid into your account, and the bank must notify you within five days that benefits have been attached.

Sacks advises people who have had benefits attached to establish stand-alone bank accounts for their Social Security deposits. “It’s much more simple and safe, and makes it much easier to trace funds,” he says.

Sacks says the government has been going after benefits more often because of changes in federal law and court rulings that have widened its powers. He urges people in their pre-retirement years to make every effort to pay off delinquent debts.

“It can be painful, but consider going to legal aid or finding a non-profit debt counselor who can help negotiate repayment. The worst thing is to ignore it.”

The government can go after delinquent debt while you’re working—but that requires a court judgment. ” are a known asset over which the federal government has total control,” says Sacks.

He adds that people sometimes are blindsided by garnishment for unpaid debts they had forgotten about. If you’re not sure about a federal debt, contact the U.S. Department of the Treasury’s Bureau of the Fiscal Service (800 304-3107), which serves as a clearinghouse for debts.

If the bureau shows a debt that you dispute, contact the agency that is owed. Do the same if your benefits already have been tapped. “Don’t try to deal with the Social Security Administration,” says Sacks. “They don’t have direct responsibility for the attachment.”

Finally, Sacks notes funds not in the bank can’t be garnished. Most people don’t hang on to Social Security benefits for long—they’re used to meet living expenses. “I hate to urge people to keep money under the mattress, but money that’s been sitting in a bank account for more than two months is exposed to attachment.”

MONEY housing

How the Financial Crisis Put Up Two More Barriers to a Secure Retirement

Two new studies underline housing and income challenges facing older Americans.

Monday marks the sixth anniversary of the bankruptcy filing of Lehman Brothers, a key event in the Wall Street meltdown that led to the Great Recession. The recession wreaked havoc on the retirement plans of millions of Americans, and two studies released last week suggest that most of us haven’t recovered well.

To be more precise: Middle- and lower-income Americans haven’t recovered at all, while the wealthiest households have done fine.

The Joint Center for Housing Studies of Harvard University (JCHS) issued its findings on the challenges we face meeting the housing needs of an aging population in the years ahead. Meanwhile, the Federal Reserve Board released its triennial Survey of Consumer Finances (SCF), a highly regarded resource for understanding American households’ finances.

The Harvard study found that our existing housing stock is ill-suited to meet seniors’ needs, including affordability, accessibility, social connectivity and support services. And high housing costs are eating into the ability of low-income older adults to pay for necessities like food and healthcare.

Housing is the largest expenditure in most household budgets, and so is a linchpin of financial security and well-being. “It’s really at the nexus of your financial health, physical health and healthcare,” says Jennifer Molinsky, research associate at the JCHS and principal author of the study.

Harvard found that a third of adults over age 50 pay more than 30% of their income for housing—including 37% of people over age 80. Harvard defines that group as “housing cost burdened.” Another group of “severely burdened” older Americans spend more than 50% of income on housing. That group spends 43% less on food, and 59% less on healthcare, compared with households that can afford their housing.

Homeowners are much less likely to be cost-burdened than renters, the study found. But more homeowners are carrying mortgages well into retirement. More than 70% of homeowners aged 50 to 64 were still paying off mortgages in 2010.

The Federal Reserve findings on middle-class retirement prospects are equally troubling. Despite the economy’s gradual mending, the SCF found a widening gap in income and net worth. The top 10% of households was the only income band registering rising income (up 2% since 2010). Households between the 40th and 90th percentiles of income saw little change in average real incomes from 2010 to 2013. And the rate of homeownership was 65%, down from 69% in 2004 and 67% in 2010.

Ownership of retirement plan accounts also fell sharply. In the bottom half of income distribution, just 40% of households owned any type of account—IRA, 401(k) or traditional pension—in 2013, down from 48% in the 2007 survey. The Fed attributes the drop mainly to declining IRA and 401(k) coverage, since defined benefit coverage remained flat. Meanwhile, coverage in the top half of income distribution was much higher. In the top 10%, 95% of families are covered.

Overall, the average value of retirement accounts jumped a substantial 10% from 2010 to 2013, to $201,300. The Fed attributed that to the strong stock market and larger contributions. But for the lowest-income group that owned accounts, the average combined IRA and 401(k) value was just $39,100—and that is down more than 20% from 2007.

Considering the stock market’s strong performance in the intervening years, that suggests many of these households either sold while the market was depressed, drew down savings—or both. Meanwhile, upper-middle-income households saw a gain of 20% since 2007.

In Washington, lobbyists and policymakers have been debating about whether a retirement crisis really is looming. The various sides typically filter the data to support their viewpoints and agendas. But it’s difficult to think of two sources aligned than the Federal Reserve Board and Harvard. The SCF, in particular, is widely viewed as a gold standard survey that will be relied on for many economic reports in the months ahead. It includes information on the household balance sheets, pensions, income and demographic characteristics of about 6,500 families.

The JCHS study was funded by the AARP Foundation and The Hartford insurance company, so there’s a possible agenda there, if you doubt Harvard’s independence as researchers. (I don’t.)

Taken together, the studies paint the portrait of a widening divide in the retirement prospects of working Americans. No matter how the data is sliced, we’ve got problems that need to be addressed.

MONEY working in retirement

Here’s the Best Way to Rescue Your Retirement and Find Happiness Too

A second career can provide income as well as meaning. This advice from retirement expert Chris Farrell can help you plan your next venture.

Chris Farrell has a hot retirement investing tip for you, but it’s not a stock or bond.

Farrell wants you to invest in yourself. In his new book, Unretirement (Bloomsbury Press), he argues that developing skills that can help you earn income well past traditional retirement age offers a better return on investment than any financial instrument—and it can help transform the economy as it continues to heal from the Great Recession.

Farrell is senior economics contributor at public radio’s Marketplace, a contributing editor at Bloomberg Businessweek and a columnist for the Minneapolis Star Tribune. In a recent interview, I asked him to describe his vision of unretirement.

Q: How do you define “unretirement”?

“Unretirement” is about the financial impact of working longer. If you can work well into your 60s, even earning just a part-time income through a bridge job or contract work, you’ll make so much more in the course of a year than you could from saving.

That changes the financial picture—and not just income. You also don’t have to tap your retirement nest egg during those years, and you might be able to add to it. And it allows you to realistically wait to claim Social Security between age 66 and 70, depending on your health and personal circumstances.

Q: What are the essential tools and strategies for people trying to figure out how to unretire? Where should they begin?

The most important thing is to begin by asking yourself what it is you want to be doing—what kind of work. Do informational interviews with people. The real asset that older workers have is their networks—the people who have known them over the years. Talk with them to find out if you need to add new skills.

Don’t romanticize any particular idea—research it. Think about how you can take your existing skills and move into a different sector of the economy with those.

Q: One of the biggest obstacles facing older workers is age bias. Are employers adapting to help older people keep working longer?

The only evidence I’ve seen of that is at companies that face very tight labor markets—typically technology businesses. It’s also true for the nursing profession. For the rest of the economy, I’ve been to conference after conference focused on older workers, where employers wring their hands about all the brain power walking out the door. They’re sincere, but when they go back to the office they really aren’t motivated to do anything about it because the labor market isn’t strong enough

Q: If that’s the case, how will unretirement be able to take hold as a trend?

The economy is getting better, and labor markets are tightening. But this also will be driven by grassroots change. Many leading-edge boomers are negotiating their own deals, starting businesses or setting themselves up for self-employment with a portfolio of part-time jobs. It’s very do-it-yourself.

And attitudes are changing—there will be enormous pressure from society as people push for this. They’re going to be saying, “We’re pretty well educated, and healthier than we were before, and the numbers don’t work for us to go down to Florida or Arizona and retire—and we actually don’t want to do that.”

Q: There’s a great debate under way over whether we are headed for a crisis in retirement security or not. What’s your view?

I don’t think there will be a retirement crisis if we continue to work longer. But we’re going to want to do it with jobs that provide meaning rather than those that make people just miserable enough that they have to continue to work.

One thing that upsets me is that we have a conflation of financial stresses facing the middle class and pretending that the middle class will be in poverty in retirement—and that’s just not true. There is a group that is really vulnerable—they’ve worked all their lives for companies that don’t provide retirement or health insurance benefits. That is the really vulnerable group.

I think two-thirds of our society will be fine, but for this other group, it’s not about investing in a 401(k), because they simply don’t have the money. For them, Social Security will be the entire retirement plan.

Q: That suggests we will need to beef up Social Security, at least for the lowest-income retirees.

Absolutely. If a majority of us are healthy and continue to work and pay into the Social Security system, we will become a wealthier society—and we will be able to afford to be more generous with Social Security.

Chris Farrell’s write columns on second careers for NextAvenue.com, which also appear on Money.com; you can find his articles here.

MONEY Social Security

What’s Missing in Your New Social Security Benefits Statement

colored balloons in a question mark formation
iStock

Many workers will start receiving Social Security benefits statements again. Just don't expect to see much discussion of inflation's impact on your payout.

The Social Security Administration will be mailing annual benefit statements for the first time in three years to some American workers. That’s good news, because the statements provide a useful projection of what you can expect to receive in benefits at various retirement ages, if you become widowed or suffer a disability that prevents you from working.

But if you do receive a statement next month, it is important to know how to interpret the benefit projections. They are likely somewhat smaller than the dollar amount you will receive when you actually claim benefits, because they are expressed in today’s dollars—before adjustment for inflation.

That is a good way to help future retirees understand their Social Security benefits in the context of today’s economy—both in terms of purchasing power, and how it compares with current take-home pay. “For someone who is 50 years old, this approach allows us to provide an illustration of their benefits that are in dollars comparable to people they might know today getting benefits,” says Stephen Goss, Social Security’s chief actuary. “It helps people understand their benefit relative to today’s standard of living.”

In part, the idea here is to keep Social Security out of the business of forecasting future inflation scenarios in the statement that might—or might not—pan out. The statement also provides a starting point for workers to consider the impact of delayed filing.

“It provides valuable information about how delaying when you start your benefit between 62 and 70 will increase the monthly amount for the rest of your life—an important fact for workers to consider,” says Virginia Reno, vice president for income security at the National Academy of Social Insurance.

Unfortunately, the annual statement is silent when it comes to putting context around the specific benefit amounts. The document’s only reference to inflation is a caveat that the benefit figures presented are estimates. The actual number, it explains, could be affected by changes in your earnings over time, any changes to benefits Congress might enact, and by cost-of-living increases after you start getting benefits.

And the unadjusted expression of benefits can create glitches in retirement plans if you do not put the right context around them. Financial planners don’t always get it right, says William Meyer, co-founder of Social Security Solutions, a company that trains advisers and markets a Social Security claiming decision software tool.

“Most advisers do a horrible job coming up with expected returns. They choose the wrong ones or over-estimate,” he says, adding that some financial planning software tools simply apply a single discount rate (the current value of a future sum of money) to all asset classes: stocks, bonds and Social Security. What’s needed, he says, is a differentiated calculation of how Social Security benefits are likely to grow in dollar terms by the time you retire, compared with other assets.

“Take someone who is 54 years old today—and her statement says she can expect a $1,500 monthly benefit 13 years from now when she is at her full retirement age of 67,” says William Reichenstein, Meyer’s partner and a professor of investment management at Baylor University. “If inflation runs 2% every year between now and then, that’s a cumulative inflation of 30%, so her benefit will be $1,950—but prices will be 30 percent higher, too.

“But if I show you that number, you might think ‘I don’t need to save anything—I’ll be rich.’ A much better approach for that person is to ask herself if she can live on $1,500 a month. If not, she better think about saving.”

About those annual benefit statements: the Social Security Administration stopped mailing most paper statements in 2011 in response to budget pressures, saving $70 million annually. Instead, the agency has been trying to get people to create “My Social Security” accounts at its website, which allows workers to download electronic versions of the statement. The move prompted an outcry from some critics, who argue that the mailed statement provides an invaluable reminder each year to workers of what they can expect to get back from payroll taxes in the future.

Hence the reversal. Social Security announced last spring that it is re-starting mailings in September at five-year intervals to workers who have not signed up for online accounts. The statements will be sent to workers at ages 25, 30, 35, 40, 45, 50, 55 and 60.

MONEY Second Career

These New Programs Help Workers Retire at Their Own Pace

The federal government will allow employees to phase in their retirement by working part-time. But private companies are slower to offer this benefit.

Gwendolyn Ross will turn 66 in November, but she isn’t ready to retire. A deputy comptroller for the U.S. Coast Guard in Miami Beach, Florida, she hopes to work until she’s 70—but she would like to cut back her hours.

“I have some health issues that require a lot of visits to the doctor, and I’d love to have more time to visit my family in Michigan,” she says. At the same time, she needs to keep working to prepare for retirement. “As I get closer to it, I realize I’m not as financially ready as I thought I would be when I was younger. The time went by really quickly.”

Ross is a great candidate for a new federal government program that will allow workers to opt for a phased retirement. Participants in the program, which launches this fall, will be able to work half-time while collecting half their pensions after they reach the eligible retirement age.

For the government, the program is expected to be a money saver. The Congressional Budget Office estimated recently that 1,000 employees might take advantage of phased retirement annually, and would continue work for three years. That would cut required contributions to the government’s pension system by $427 million from 2013 to 2022, and boost worker contributions by $24 million.

But phased retirement also will help the government retain talent and expertise at a time when the “brain drain” from an aging workforce is a major concern. About 600,000 people, or 31% of the federal civilian workforce, will be eligible for retirement by September 2017, according to the U.S. Government Accountability Office. Phased retirees will be required to spend at least 20% of their time mentoring younger employees.

“It can help people who want to phase out over time, but it makes sense for the whole workforce,” says Kevin E. Cahill, a research economist at Boston College’s Sloan Center on Aging and Work. “Younger workers can tap into the knowledge that the older crowd has, and make sure it doesn’t get lost lost.”

Worker interest in a flexible glide path to retirement is strong, and it’s not limited to the federal payroll. A survey this year by the Transamerica Center for Retirement Studies found that 64% of workers—of all ages—envision a phased retirement involving continued work with reduced hours. For workers closest to retirement, frequently cited reasons for continued work included financial need (34%) and a desire for income (19%). But 34% had a desire to “stay involved” or said they enjoyed their work.

Employers have been slow to respond. Just 21% of respondents to the Transamerica survey said their employers offer phased retirement—and that figure may be too optimistic.

The Society for Human Resource Management reports that 11% of employers provide some version of phased retirement, with only 4% having formal programs. Cahill’s research shows similar employer disinterest in phased retirement programs.

“Sometimes there are institutional or administrative restrictions,” he says. “And some employers may have good reasons not to offer flexible hours.”

Much more common, he found, are workers who find what they need by changing jobs. “These are bridge jobs that carry people through from their careers to withdrawal later on from the labor force,” he says.

Some experts think phased retirement options will become more popular as the economy improves and labor markets tighten, particularly as demand for specialized skills rises. And the federal government’s move could be a catalyst for change in the private sector.

Each federal agency will write its own eligibility rules, and phased retirement won’t be a guaranteed right for all workers. But basic eligibility will depend on which of the two major federal retirement programs covers an employee.

The government has a legacy Civil Service Retirement System (CSRS), a traditional defined-benefit system, and the newer Federal Employees Retirement System (FERS), a defined-contribution program with a small traditional pension component.

CSRS employees will be eligible for phased retirement at age 55 with 30 years of service, or at 60 with 20 years of service. FERS employees must be 60 with 20 years of service, or have 30 years of service and have reached their minimum retirement-eligible age.

Interest in the program is strong, according to Jessica Klement, legislative director of the National Active and Retired Federal Employees Association.

“The number of phone calls we get from members tells me there are a lot of people waiting for this,” she says. “Many of them are ready to take a step back, but they don’t really want to quit yet.”

MONEY Pensions

Reasons to Hold Off on That Pension Buyout Offer

Lump-sum pension buyouts are a good deal for employers. But workers who take them could lose out if interest rates rise.

If you work for a company with a pension plan, don’t be surprised if you get an offer soon for a lump sum buyout—a deal where you accept a pile of cash in exchange for the promise of lifetime income when you retire.

The price tag for these offers is especially attractive right now, from the plan sponsor’s perspective. But workers might do better by holding out for a better deal, or by rejecting the buyout altogether.

A growing number of plan sponsors are trying to get out of the pension business, or lighten their obligations, by buying out workers. The number of buyout offers has accelerated in recent years, in part because of interest rate changes mandated by Congress that reduce their cost to plan sponsors.

Now, revised projections for average American longevity are giving plan sponsors new reasons to accelerate buyout offers. New Internal Revenue Service actuarial tables that take effect in 2016 show average lifespans up by about four years each for men, to an average of 86.6 years, and women, to 88.8 years.

The new mortality tables will make lump sum offers 3% to 8% more expensive for sponsors, according to a recent analysis by Wilshire Consulting, which advises pension plan sponsors. Another implicit message here is that lump sum offers should be more valuable to workers who take them after the new mortality tables take effect.

Unfortunately, it’s not that simple.

“We’re definitely seeing an increase in lump sum offers from plan sponsors,” says Jeff Leonard, managing director at Wilshire Consulting, and one of the experts who prepared the analysis. “But if it was one of my parents, I’m not sure if I’d encourage them to take the offer now or wait.”

The reason for his uncertainty is the future direction of interest rates. If rates were to rise over the next couple years from today’s historic low levels, that would reduce lump sum values enough to offset increases generated by the new mortality tables. Leonard estimates that a rate jump of just 50 basis points would eliminate any gain pensioners might see from the new tables.

Deciding whether to accept a lump sum offer is highly personal. A key factor is how healthy you think you are in relation to the rest of the population. If you think you’ll beat the averages, a lifetime of pension income will always beat the lump sum.

Another consideration is financial. Some people decide to take lump sum deals when they have other guaranteed income streams, such as a spouse’s pension or high Social Security benefits.

The size of the proposed buyout matters, too. If you’ve only worked for your employer a short time and the payout is small, it may be convenient to take the buyout and consolidate it with your other retirement assets.

Some people think they can do better by taking the lump sum and investing the proceeds. It’s possible, but there are always the risks of withdrawing too much, market setbacks or living far beyond the actuarial averages, meaning you would need to stretch that nest egg further.

And doing better on a risk-adjusted basis means you would have to consistently beat the rate used to calculate the lump sum by investing in nearly risk-free investments—certificates of deposit and Treasuries—since the pension income stream you would receive is guaranteed. Although the math here is complicated, it usually doesn’t work out in a pensioner’s favor.

Could you wait for a better deal? Lump sum buyouts are take-it-or-leave it propositions. But Leonard says workers who decline an offer may get additional opportunities over the next few years as plan sponsors keep working to reduce their pension obligations. “Candidly, I think we’ll see a continued series of windows of opportunity.”

MONEY Health Care

Why the Good News for Retiree Health Care May Not Last

With overall health-care costs in check, Medicare didn't hike the premiums seniors pay again this year. But once economic growth picks up, rising prices could come back too.

Medicare turned 49 years old last week, and the program celebrated with some good financial news for seniors: Premiums will not rise in 2015 for the third consecutive year.

The question now: How long can the good news persist? Worries about Medicare’s long-range financial health persist, but for now persistent low healthcare cost inflation will translate into a monthly premium of $104.90 next year for Part B (outpatient services), according to the Medicare trustees. Meanwhile, the Centers for Medicare & Medicaid Services (CMS) says the average premium for a basic Part D prescription drug plan will rise by about $1, to $32 per month.

The Part B premium has been $104.90 since 2012—except for 2011, when it actually dropped by about $15, to $99.90. The moderation is good news for seniors, since premiums are deducted from Social Security checks. Beneficiaries will keep all of next year’s Social Security cost-of-living adjustment, which likely will be about 1.7%.

Meanwhile, the average Part D premium has been $30 or $31 since 2011. That’s because of a dramatic shift to cheap generic drugs, and innovation by plan providers competing for customers.

“Seniors can expect to see more of what they’ve been getting over the last few years, which is increasing effort by Part D insurers to offer very-low-premium plans,” says Matthew Eyles, executive vice president of Avalere Health, a consulting firm specializing in healthcare.

As in recent years, Eyles says, the best deals will be found in plans that require enrollment in preferred pharmacy networks. Those plans offer lower premiums and co-pays. “We’ll also see plans limiting or eliminating deductibles, and encouraging the use of generics by offering them free or at nominal prices,” says Eyles.

But the average figures mask a more complicated story. Part D enrollees will find significant regional variations in premiums around the country. CMS data shows average premiums will be as low as $21.19 in New Mexico, and $25.83 in Florida—but as high as $39.74 in Idaho and Utah.

Eyles says it is not entirely clear why premiums will vary so extensively, although the prices tend to track the overall cost of healthcare, and are related to the overall healthiness of seniors by state.

“The plan providers have to submit bids for regions that take into account differences in the enrolled populations, including prescribing and utilization patterns,” he says. “It could be that one state tends to have more people using statins, or a diabetes medication.”

Another complication in Part D is the “doughnut hole,” the gap in coverage for Part D enrollees with high drug costs. Higher-cost plans are available to provide gap coverage, but the hole’s size is being shrunk under a provision of the Affordable Care Act (ACA), and the gap is set to disappear in 2020.

The coverage gap begins after you and your drug plan have spent a certain amount for covered drugs. Next year the gap starts at $2,960 (up from $2,850 this year) and ends after you’ve spent $4,700 (up from $4,550 this year).

Seniors who enter the gap also get discounts on brand-name and generic drugs, and those breaks will be larger next year. Enrollees will pay 45% of the cost of brand-name drugs in 2015 (down from 47.5% this year) and 65% of the cost of generic drugs (down from 72% this year).

Can the recent good news on lower healthcare costs continue indefinitely? Medicare spending reflects our overall health economy, and the big picture is that the United States does not have effective controls on spending growth. Healthcare outlays have quadrupled since the 1950s as a percentage of gross domestic product, to 17.7% in 2011. What’s more, our spending is more than double any other major industrialized nation, according to the Organization for Economic Cooperation and Development.

Still, our per capita Medicare spending growth averaged 2% from 2009 to 2012, and it was nearly zero last year.

The Obama administration often points to the ACA, but outside experts are more skeptical. Research published this month by Health Affairs, a leading health policy and research and journal, credited 70% of the recent spending slowdown to the slack economy. Absent further changes in the structure of our healthcare system, the researchers expect higher healthcare inflation to resume as the economy improves.

“A significant amount of it is due to the economic slowdown,” says Eyles, “although we know that changes in the way providers deliver care, and how providers are being paid are also making a difference in the overall rate of growth.”

MONEY Savings

Here’s the Magic Amount You Need to Retire Happy

Numbers from American paper currency
George Adamson—Getty Images/The Bridgeman Art Library

A financial planner estimates how much money you need to save — and shares 5 keys to a successful retirement.

Most people would say money can buy you happiness in retirement, but financial planner Wes Moss wanted the details: Just how much money does it take to retire happily? And is there a point of diminishing happiness returns on the size of a nest egg?

Moss surveyed 1,350 retirees about net worth and income, assets and home equity. But he wasn’t hunting for the number of dollars it takes to live — rather, he wanted to understand how money correlates to retirees’ levels of happiness. To that end, he posed a series of detailed questions about their lives: where they shop, what kinds of cars they drive, how many vacations they take annually, their family lives and the activities they pursue. Then he associated their levels of reported happiness with their financial condition.

Here’s what he found: Most people can be happy in retirement with savings of about $500,000. A higher number can buy more happiness, but only to a point.

“There is a plateau-ing effect above that number, and the higher you get the rate of increase gets smaller,” Moss says. “I call it diminishing marginal happiness.”

Moss, managing partner and chief investment strategist at Capital Investment Advisors in Atlanta, explores the correlation of wealth and retirement happiness in his new book, You Can Retire Sooner Than You Think: The 5 Money Secrets of the Happiest Retirees. Moss is a registered investment adviser who previously worked for a big Wall Street firm.

His five secrets include a careful determination of what you actually want to spend money on in retirement and how you’ll save to meet your goals; paying off your mortgage early; developing diverse sources of income in retirement; and learning how to invest for income.

Here’s an edited transcript of five questions I asked Moss about his findings in a recent interview.

Q. Who are the happy retirees, and what makes them happy?

It’s not how much you save but how much you save in relation to what you need. When I worked on Wall Street, what we always were trying to breed is an expectation with clients that they need to spend more and more — you need an infinite amount because you will need to spend just as much or more in retirement. That’s what the mutual fund industry and Wall Street preach.

But we found that for most people, the amount of happiness correlates to median savings around $500,000. There are some increases above that number, but it’s a slower rate of incremental gains. So think of $500,000 as a financial bare minimum.

Q. Are the happy retirees making adjustments to their spending in order to be comfortable?

The survey data doesn’t tell me that, but my real-life experiences with clients suggest that people take a realistic look at how much income they’ll have — perhaps they have two or three thousand in Social Security income, and they can take another $3,000 monthly from their investments. They look at that and decide that they can live a good life on $6,000 a month.

Q. What makes retirees unhappy — and how can people avoid winding up there?

Many of the unhappy retirees are still paying mortgages, with no light at the end of the tunnel. Another thing I see a lot is people who don’t take care of big expenses before they retire – they wait to redo the kitchen until they retire because they think they’ll have time to deal with it then. But it’s much better to do these things while you’re working and still have cash flow.

Another mistake is people who don’t have enough core pursuits in retirement. They were too myopic and entrenched in making money and working before, and now they’re not as busy as they need to be. They are blindsided by free time.

Q. I’ve heard both sides of the mortgage-in-retirement argument — some argue it’s better to invest that money rather than use it to pay off a mortgage. Sounds like you’re a firm believer in getting rid of them.

If you have resources in a taxable account, I’d rather see a client use that to pay off the mortgage in one fell swoop — or, just accelerate your monthly payments by $200 to $400, which can shave a full decade off of a mortgage. I know people will argue that they can get a higher return putting that money in stocks, but I’ve seen a lot of periods in my career where all the market did was crash and then recover. Most Americans don’t get that average 9% stock market return over time, so a safer bet is to save that guaranteed 4% or 5% that a mortgage costs. Also, with older clients, what I see is an enormous level of contentment among people who have figured out how to get rid of their mortgages.

Q. Your book lays out a model for retiring early — or earlier than you think you could. That runs counter to much of the talk we hear today about longevity and the need for everyone to work longer. Why do you think people can retire earlier than planned — and how do you define the word “early”?

I define it as being in a position retire at 60 or 62. And there is a group of people where it’s obvious they have the financial means to retire — but the concept is foreign and they don’t have a handle on their finances. I’ve had many client meetings with couples where one spouse thinks they can retire, and the other doesn’t — but when you add up all their different accounts, you see that they have $750,000, along with pensions and Social Security. These are people who definitely could retire if they choose.

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