What's the best place to retire? Keep these factors in mind before settling down
Editor's Note: Journalist Philip Moeller is here to provide the answers you need on aging and retirement. His weekly column, "Ask Phil," aims to help older Americans and their families by answering their health care and financial questions. Phil is the author of the new book, "Get What's Yours for Medicare," and co-author of "Get What's Yours: The Revised Secrets to Maxing Out Your Social Security." Send your questions to Phil.
I've always taken those "Best Places to Retire" lists with a very big grain of salt. Most people think the best place to retire is right where they are, usually staying in their own homes as long as possible. Family concerns are another driver, with people moving to be near grandchildren or perhaps other relatives, especially those who need looking after.
I have become convinced, however, that location will become a more significant variable in later-life decisions. Several factors are shaping this shift.
President Trump and the Republican Congress want to give states a much greater say in how they spend federal health care dollars, particularly in the Medicaid program. Medicare does not cover long-term care, and Medicaid is the primary payer of nursing home care for millions of lower-income, older Americans. Changes in Medicaid thus could produce big differences in the amount and quality of health care provided by different states.
Democrats vow to strongly resist these efforts, and it's not at all clear that Republicans will be able to agree among themselves that they should even more forward with a version of the American Health Care Act that passed the House of Representatives.
But there is a lot of writing on the wall here that says states will not be able to look to Washington for the kind of funding support they've enjoyed.
Federal deficits have not been a widespread concern since the deep recession began roughly 10 years ago. Deficit spending was accepted by even many conservatives as a necessary antidote to a weak economy. With inflation remaining very low, our rising national debt has not produced painful consequences to date.
But the weak recovery has nonetheless been a recovery. The unemployment rate is now at a 16-year low of 4.3 percent. I grant that many people are badly underemployed, working in jobs they dislike for equally disappointing salaries. Millions of other unemployed people are not even counted in the work force.
Still, warts and all, we are approaching — if not already at — full employment. Historically, a steady supply of legal and illegal immigrants would have boosted the supply of labor. But with the immigration spigot turned tighter, rising pressure on wages and price levels would hardly be surprising. Any appreciable uptick in inflation would ratchet up interest costs on the national debt, bringing federal deficits back into the news.
Already, rising numbers of older Americans are driving higher federal government spending on Social Security, Medicare and Medicaid. If the rate of inflation picks up, these programs will become unsustainable even earlier than forecast. Even a sympathetic Washington, which we don't have today, would have little choice but to reduce its support for senior safety nets. This, in turn, would give the states more effective say in shaping local safety-net supports.
At the same time, lack of consensus in Washington on just about everything has been the norm for several years. Many state governors and legislatures have responded to this federal vacuum by charting either modest or major changes in the courses that their states are taking.
Against this backdrop, three other trends deserve mention:
First, climate change appears to be having an unequal impact on different parts of the United States. As this reality becomes better understood and more pronounced, it can't help but produce winners and losers among the states.
Second, the rising numbers of older citizens has boosted attention to the quality of life offered to seniors in different cities and states. So-called "age friendly" programs and policies have the potential to create significant differences in the desirability of living in different parts of the country. The Milken Institute, among others, has been assembling a compelling case for this in its annual "Best Cities for Successful Aging" reports.
Third, there already are significant differences in state tax policies. These have long influenced retirement location decisions of wealthier folks. As states wrestle with the consequences of more responsibility for their older citizens' retirement and health needs, these differences could become even more pronounced.
Now, before you scatter to the retirement hills in whatever state beckons you, here are this week's reader questions.
John – Massachusetts: My wife is 66 and has a health savings account. She recently was laid off and thus will need to sign up soon for Medicare. We know that doing so will render her ineligible to continue contributions to her HSA, but we are confused about the part of this rule that says the effective date of her signing up for Part A of Medicare could be retroactive to six months prior to her enrollment. If she signs up for Medicare soon, will this six-month retroactivity affect her HSA contributions for last year? Might she be better off waiting until July 1 to sign up? Or could I simply request an HSA distribution for November and December of last year and pay taxes on that amount?
Phil Moeller: The six-month retroactivity "gotcha" for HSA eligibility stems from Social Security rules, and it certainly could affect 2016 contributions. But the biggest issue with your timing question is not about possible IRS penalties for making improper contribution. It is, or should be, making sure your wife does not find herself with no health insurance, even for one day. Thus, she should either get Medicare right away or get a COBRA continuation policy through her former employer, but for no more than a couple of months. Her Medicare enrollment period began as soon as her employer coverage ended. Having COBRA does not pause the clock on when she needs to have Medicare and avoid its late-enrollment penalties.
If she waited until July, you would eliminate the need to deal with the IRS on 2016 tax issues. But you will still have to adjust your 2017 tax returns to reverse the benefits of any pre-tax contributions to her HSA this year. Whether you will face IRS penalties is another matter, although it seems to me that making HSA adjustments during 2017 will remove any tax benefit you may have received and thus eliminate the cause for being penalized. However, I have learned never to predict what the IRS might or might not do.
David: My parents are Christian missionaries in Mexico. They have been doing this for more than 40 years. Needless to say, they have not made very much money throughout their life and have no serious post-retirement plans. My mother turns 65 this year and she has no clue what she is supposed to do (my father is a Mexican citizen). They have been getting wages though their sponsoring church, so I assume they have contributed to Social Security and Medicare. My parents plan to remain in Mexico. What would be their best course of action?
Phil Moeller: In terms of Social Security, they (or you) should use their Social Security numbers to open online accounts with the agency that will show them their benefits under some different claiming ages. Our Social Security book goes into all the gory details of how they can evaluate these options.
In terms of Medicare, they probably should do nothing, so long as they are confident they will not live in the U.S. later in their lives. I recently wrote an explanation of Medicare issues for ex-pats that might provide you a good overview.
Gary: Regarding Medigap rating approaches, it appears that community rating is superior to the issue-age or the attained-age rating. I reached this conclusion based on that fact that it is not age related, like the attained-age approach, and not individually health related, like I assume the issue-age rated approach to be. Am I correct here?
Phil Moeller: When a person first becomes eligible for Medicare, they normally have what's called a guaranteed access period for Medigap. During this period, Medigap insurers are not allowed to discriminate against an applicant based on their health. Having said that, the prices of both issue age and attained age policies may be affected over time by the generally poorer health of pools of older policyholders.
Here are explanations of these approaches that were provided to me for research on my Medicare book. I found them helpful, and hope you do, too:
Attained age rating, when structured properly, reflects the underlying costs for each age. This rating type is used frequently since it is least expensive for younger insureds (e.g., age 65), even though it is most expensive for older insureds. While this structure may provide the lowest rates for someone first eligible for Medicare, rates increase over time for both aging (about 2% to 4% per year up to age 80 or 85) and inflation. At older ages, it may be challenging to pay the higher rates required. For those who want the lowest rates now and who may not expect to live long, attained age rating may provide the best value.
Issue age rating charges a rate that's a little higher than the cost of benefits during the first few years and invests the excess in a reserve that grows with interest and survivorship. (Survivorship means that the reserve for people who die or terminate their coverage is shared among those who remain.) In later years when the issue age rate is not enough to cover the cost of benefits, the reserve is used to help fund the difference. This structure has a higher initial cost than attained age rating and is not used often except in states that require it (Florida, New Hampshire) or prohibit the use of attained age rating (several states including Idaho). Rates increase for inflation but do not increase due to age. With issue age rating, people enrolling at older ages pay higher rates than people enrolling at younger ages. Issue age rating helps members avoid the higher rate increases associated with attained age rating and can provide excellent value for those who expect to continue their insurance for many years.
With pure community rating, everyone in the community pays the same amount for their plan. (A state may have more than one community, defined by geographic region within the state.) Similar to issue age rating, younger insureds pay more than their average cost of benefits, while older insureds pay less than their average cost of benefits. Unlike issue age rating, there is no reserve build up since today's younger insureds are subsidizing the extra costs for today's older insureds. Community rating is required in seven states: Connecticut, Maine, Massachusetts, Minnesota, New York, Vermont and Washington. Pure community rating is not often used in states where it is not required, since community rates are higher for younger insureds than attained age rates and issue age rates. Modified community rating may include rates that vary within the community based on factors other than age. Rates under modified community rating can be competitive with attained age and issue age rates, and can provide excellent value for people of all ages.
Deanna: I know you are the guru on Social Security and Medicare, and I love reading your articles! I'm nearly 64 years old and still working. My husband passed away two years ago. Last year, I started collecting Social Security survivor benefits, but I only get six months' worth a year, because I'm still working, and the earnings test reduces my benefits. My question concerns Medicare. I will be 65 next year in July 2018, and I'm not sure how long I'll continue to work. Since I'm collecting Social Security, will I automatically be enrolled in Medicare Parts A and B? I have insurance coverage at work that includes health, vision and dental. It is less expensive than Medicare Part B. I know Medicare Part A will not charge me a premium. Should I enroll, or keep Part A if I'm automatically enrolled? Would my work insurance be my primary coverage even if I have Medicare Part A and/or Part B? If I decline Medicare when I turn 65, will I be able to enroll once I decide to retire?
Phil Moeller: When you turn 65, you should be automatically enrolled in Part A of Medicare but not Part B. Mistakes do happen, of course, so if Social Security does enroll you in Part B, you need to quickly contact the agency and reject Part B until you retire and lose access to your employer health insurance.
Having Part A invalidates continued participation in a health savings account. But I'm guessing you don't have an HSA, or you would already have encountered this rule. For people without HSAs, I recommend keeping Part A, which can come in handy as a secondary insurer for covered hospital expenses.
You don't need to worry about getting Medicare until you lose your employer health coverage. At that time, you will have an enrollment period to get Medicare and will not face any issues for not having done so when you turn 65.