Medicare Supplements Vs Medicare Advantage Plans

Medicare is a federally funded health insurance program in the United States that primarily serves those aged 65 and above. Medicare offers several options for individuals to choose from, including Medicare Supplements and Medicare Advantage plans. While these two options have some similarities, they have significant differences that individuals should be aware of before making a decision.

Medicare Supplements, also known as Medigap, are private health insurance plans designed to supplement Original Medicare (Part A and Part B) coverage. Medigap plans pay for some or all of the out-of-pocket costs not covered by Medicare, such as copayments, coinsurance, and deductibles. There are ten standardized Medigap plans, each labeled with a letter (A, B, C, D, F, G, K, L, M, and N). Each plan covers a different set of benefits, and every insurer that offers Medigap plans must offer the same standardized benefits for each plan type.

In contrast, Medicare Advantage plans, also known as Medicare Part C, are an alternative to Original Medicare. These plans are offered by private insurance companies that contract with Medicare to provide Part A and Part B benefits. Medicare Advantage plans typically offer additional benefits not included in Original Medicare, such as prescription drug coverage, vision, and dental services. In most cases, Medicare Advantage plans have lower out-of-pocket costs than Original Medicare, but they also often require individuals to use a specific network of healthcare providers.

One of the significant differences between Medigap and Medicare Advantage plans is how they cover healthcare costs. Medigap plans are designed to supplement Original Medicare coverage, so individuals can see any healthcare provider that accepts Medicare. Medigap plans may have higher monthly premiums, but they often result in lower out-of-pocket costs when seeking medical care.

On the other hand, Medicare Advantage plans have a set network of healthcare providers that individuals must use to receive coverage. These networks can be restrictive and limit an individual’s ability to see a specialist or a preferred doctor. However, Medicare Advantage plans often have lower monthly premiums, and some plans may offer additional benefits such as vision, dental, or prescription drug coverage.

Another difference between the two options is how they are regulated. Medigap plans are regulated by both state and federal laws, and insurers must adhere to specific standards when offering plans. These standards ensure that each plan type offers the same standardized benefits, and that premiums are based on community rating, not individual health status.

In contrast, Medicare Advantage plans are regulated by both Medicare and state laws. These plans have different rules and regulations than Medigap plans, and insurers can design plans with varying levels of benefits and cost-sharing requirements. Additionally, Medicare Advantage plans can use risk adjustment to determine premiums, which means that an individual’s health status can impact their monthly premium.

In summary, the primary difference between Medigap and Medicare Advantage plans is how they cover healthcare costs and the level of provider flexibility. Medigap plans offer more flexibility in provider choice but have higher monthly premiums, while Medicare Advantage plans have a set network of providers but often have lower monthly premiums and additional benefits. It is important to carefully consider individual healthcare needs, budget, and provider preferences before choosing between the two options.

Is it OK to retire with a mortgage?

The conventional wisdom is that you should pay off your mortgage before you retire. Yet many in their senior years do not, choosing instead to retire with a mortgage.

According to a study by Harvard University, 46 percent of homeowners aged 65–79 had mortgage debt in 2016, with a median balance of $77,000. Some 26 percent of owners age 80 and over also had mortgages, with a median debt of $43,000 Indeed, in just the years from 2007 to 2016, the share of households in their 80s and over with mortgage debt jumped by 16 percentage points.1

Not having to put part of your retirement income toward a monthly mortgage payment in retirement will certainly make it easier to meet your other expenses. But is it really so bad to have a mortgage payment during retirement?

“The logic behind the rule of thumb is that your income will go down in retirement, so it would be helpful if your monthly expenses went down significantly as well,” said David Reiss, a law professor who specializes in real estate and consumer financial services at Brooklyn Law School in New York.

But if your income from Social Security and a pension (if you have one), and to some extent your assets (the nest egg you plan to draw on for additional retirement income), will be sufficient to make your monthly mortgage payment and meet your other expenses in retirement, there is no real reason that you have to get rid of the mortgage, he said. (Related: Will your 401(k) be enough?)

The key is that keeping your mortgage during retirement should be part of a plan and not a response to a crisis.

More homeowners are retiring with a mortgage

More homeowners are retiring with a mortgage than a decade earlier, according to Harvard’s research. And they’re less likely to have their homes paid off because they’re purchasing later in life, making smaller down payments and tapping equity for other purchases.1

There are two potential problems with carrying a mortgage during retirement: less accumulated net wealth and the possibility of foreclosure if a retiree can’t make his or her mortgage payments. Foreclosure is harder to recover from when you’re older because you may not be able to return to the workforce to compensate for the loss and because you’re more likely to have health problems or cognitive impairments.

Having less accumulated net wealth is a problem, especially if most of your wealth consists of your home equity, which is less liquid than stocks, bonds and cash. Foreclosure can be a serious problem if it happens to you.

Some retirement-age homeowners who haven’t paid off their mortgages undoubtedly would rather be debt free but couldn’t afford to retire their home loan sooner. But others might be putting the money that could have gone toward extra mortgage payments to a better use. ( Related: Building your financial pyramid )

Paying off the mortgage before retirement makes sense for some

“Having no mortgage payment is certainly good, and if the homeowner is likely to just blow the money anyway, it’s a good choice — sort of a forced savings account that pays dividends in the form of no housing payment,” said Casey Fleming, a mortgage advisor with C2 Financial Corp. and author of “The Loan Guide: How to Get the Best Possible Mortgage”. Paying off the mortgage before retirement is a great choice for undisciplined savers who are likely to be on low fixed incomes in retirement and for people who are financially responsible but very conservative.

For many near-retirees, the decision to pay off the mortgage before retiring is more emotional than financial. One emotional component of the decision is the desire to be debt free. The other is the desire to get a safe return on investment. If you pay 4 percent interest on your mortgage balance each year, then paying off your balance is the same as earning a 4 percent annual return on an investment — not bad for a risk-free return, especially in today’s low-rate environment.

Your return from paying off your mortgage before retirement is lower if you’re still getting the full tax deduction for your mortgage interest. Say your marginal tax bracket in retirement will be 25 percent. That means your effective mortgage interest rate is 3 percent. That’s the real risk-free return you get from paying off your mortgage.

You could earn a lot more by investing in stocks, especially within a tax-advantaged retirement account such as a 401(k) or IRA. But you’d be taking on more risk.

Mortgage in retirement: Emotional and financial benefits

There are also emotional reasons to not pay off the mortgage. If paying off the mortgage would mean seriously depleting your savings, you might feel more comfortable keeping that money in your bank or brokerage account than tying it up in your home.

“Paying off the mortgage at retirement is rarely beneficial,” said Certified Financial Planning™ professional David M. Williams, director of planning services for Wealth Strategies Group in Cordova, Tennessee. Your home equity is unavailable for retirement cash flow and ultimately goes to your heirs. “Maintaining and managing a mortgage may actually improve retirement cash flow,” he said.

Doing a cash-out refinance might make sense, especially with relatively-low average mortgage rates. Low rates can be achievable if you have excellent credit and are willing to shop around. Rates will typically vary according to geographic region as well.

Cashing out your equity gives you more money to work with in retirement. A home equity loan or line of credit would also accomplish that goal, but you’ll likely pay a higher interest rate. Any of these loans will let you make use of your home equity instead of just living in it. If possible, apply well before you retire; many people will find it easier to qualify based on their working income than based on their retirement income and assets.

Fleming said continuing to make regular monthly mortgage payments but investing any excess income you would otherwise use to pay off your mortgage can be a good option for disciplined savers who are good at investing and for people who are uncomfortable without a lot of money in savings. The key is to invest in secure, long-term, high-yield investments that will give you a nest egg for making your mortgage payments in retirement.

These investments might include low-cost Standard & Poor’s 500 stock index funds or dividend-paying stocks from blue-chip companies: the same things you’re likely already investing in for retirement. Keep in mind, though, that all equity investments involve risk.

Getting rid of your mortgage payment in retirement with a reverse mortgage

Besides doing a cash-out refinance or getting a home equity loan or line of credit, there’s another way to tap your home’s equity for retirement income: a reverse mortgage.

Some reverse mortgage lenders advertise getting rid of your monthly mortgage payment as a reason to take out a reverse mortgage. Why keep working to make your mortgage payment when you really want to retire, or retire but struggle to get by because of your mortgage payment? They present a reverse mortgage as a solution. Whether it is or not depends upon individual circumstances. (Related: The pros and cons of reverse mortgages)

A reverse mortgage, also called a home equity conversion mortgage (HECM), turns the equity from your primary residence into a stream of monthly payments from the lender to the homeowner. The homeowner makes no payments to the lender, and the homeowner remains the home’s title holder. If the homeowner passes away, the lender sells the home to pay off the reverse mortgage. Any excess proceeds go to the homeowner’s estate, but if the amount owed is more than the home is worth, the lender has no recourse — they can’t go after you or your family for the balance. If the homeowner moves out and sells the home, the proceeds go first to toward repaying the reverse mortgage; if there is anything left, the homeowner keeps the balance.2

You must be at least 62 and have enough equity in your home to qualify for a reverse mortgage. You also must continue making property tax and homeowners insurance payments for as long as you live there (if you don’t, the lender can foreclose, just like they can with a regular mortgage). The amount of money you can receive from an HECM depends on how much your home is worth, how old you are, what interest rate you can get and what fees are associated with the loan. The more your home is worth, the older you are and the lower the interest rate and fees, the higher your proceeds. You can either get a single lump sum at closing to pay off your existing mortgage, or if your existing mortgage has a low balance, you can get a smaller lump sum to pay off your loan plus a line of credit to draw on in the future, if and when you need it.

Getting a reverse mortgage is an option for someone who needs to generate an income stream from their home equity, but means someone else has control of your asset and has set out the terms of how you can use it, diminishing your flexibility and liquidity, said Lisa M. LaMarche, co-founder of Milestone Wealth Advisors in Greenville, Delaware.

And a big knock on reverse mortgages is that to account for the interest that will accrue on the loan over the years plus the loan’s closing costs, the money you receive up front might only be half or less of what your home is worth.6 Reverse mortgages also limit your flexibility.

“With a reverse mortgage, your debt increases over time due to the interest on the loan,” said Jim Adkins, founder and CEO of Strategic Financial Associates, a financial planning, investment advisory, and wealth management firm in Bethesda, Maryland. “And if you change your mind or wish to move due to health reasons, proceeds from the sale of the property will go to the bank in order to pay off the reverse mortgage, leaving little or no money for yourself. Although it may seem counterintuitive, keeping a mortgage payment during retirement can potentially provide you with more freedom and flexibility in the long run.”

Many people opt to consult with a financial professional about their retirement plans, including the possibility of supporting mortgages or investigating reverse mortgages.

More from MassMutual…

Scoring senior discounts

Maximizing retirement income

A retirement roadmap

This article was originally published July, 2016. It has been updated.

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1 Joint Center for Housing Studies of Harvard University, “Housing America’s Older Adults,” Oct. 16, 2019.
2 U.S. Department of Housing and Urban Development, “Frequently Asked Questions about HUD’s Reverse Mortgages,” HUD.gov.

4 tax moves to consider before filing your return

Want to lower your 2019 tax bill? A number of opportunities to offset prior-year income and capture credits are still available until the July 15 tax filing deadline. (The due date for filing 2019 federal income tax returns was extended to July 15 from the traditional April 15 in light of the COVID-19 crisis.)

Areas to look at include:

  1. Retirement plan contributions
  2. Deductions
  3. Penalties
  4. Credits

Taxpayers who were looking to minimize their tax liability, of course, had dozens of tools at their disposal before the New Year hit, including potentially deferring income, accelerating deductions, or selling off losing stocks to offset capital gains — a concept known as tax-loss harvesting. But those opportunities abruptly ended on Dec. 31 for the 2019 tax-filing season.

“There were a whole host of tax moves you could make before the end of the year,” said Paul Morrone, a certified public account and financial planner for U.S. Wealth Management in North Haven, Connecticut, in an interview. “Most have expired, but not all.”

Those that remain, he said, revolve primarily around retirement plan contributions, tax credits, and penalty avoidance.

Retirement plans: Retroactive contributions

Your traditional Individual Retirement Account, or IRA, offers the biggest potential bang for the buck.

The Internal Revenue Service (IRS) allows taxpayers to make deductible prior-year contributions all the way up to the tax-filing deadline. (Related: IRA advantages)

For tax year 2019, total contributions to all of your traditional and Roth IRAs for taxpayers under age 50 cannot be more than either $6,000, or your total compensation for the year if you earned less than that amount. Those 50 and older can make an additional $1,000 catch-up contribution, for a total of $7,000.1

Deductible contributions could save you big. A taxpayer in the 25 percent federal and 5 percent state tax brackets, said Morrone, “effectively gets a 30 percent return right out of the gate by virtue of a reduction in their federal and state tax bill.” On a $5,500 contribution, that amounts to a $1,650 tax savings.

Your actual tax deduction, however, may be limited if you or your spouse are covered by a retirement plan at work and your income exceeds certain levels.

For those covered by a workplace retirement plan, the deduction begins to phase out for single tax filers who made more than $64,000 in 2019 and disappears completely at $74,000 and beyond — $103,000 and $123,000 respectively, for married taxpayers who file jointly.2

Eligible taxpayers can also make retroactive contributions to their Roth IRA until July 15. Different phaseout limits apply for Roth contributions.

Because Roth IRAs are funded with after-tax dollars, your contribution will not yield a current-year tax deduction, but it could potentially produce a better investment return since earnings upon retirement can be distributed tax free.

Simplified Employee Pension IRA (SEP IRA) account owners who get an extension to file can potentially delay their contribution further still, until October.

Contributions to a SEP-IRA, geared for small-business owners and the self-employed, cannot exceed the lesser of 25 percent of total compensation or $57,000 for 2019.

If you operated a business last year, the “SEP may be a terrific way to receive a deduction and save for retirement with contribution limits well over those available with regular IRAs,” said Elliot Herman, a CFP® and CPA with PRW Wealth Management in Quincy, Massachusetts, in an interview.

Tax deductions: Roll up your sleeves

Most taxpayers take the standard deduction, a fixed dollar amount set forth by the IRS that reduces the amount of income on which they are taxed.

(Learn more: Overlooked tax deductions)

Why? Because it’s a lot less work. You don’t have to keep track of your expenses, or individually deduct them on IRS Schedule A. Under the tax-reform legislation known as the Tax Cuts and Jobs Act (TCJA), which took effect in 2018, the standard deduction has nearly doubled in 2019 to $12,200 for single filers, $24,400 for married taxpayers filing jointly, and $18,350 for heads of household.

As a result, many taxpayers who previously itemized deductions may find it more beneficial to claim the standard deduction this year.

Big changes for itemized deductions

To determine whether you might come out ahead by itemizing, you must first be aware that the TCJA

changed the rules significantly for how taxpayers itemize deductions.

According to the IRS:

  • The income-based phaseout of certain itemized deductions no longer applies. That means some taxpayers may be able to deduct more of their total itemized deductions if those deductions were previously limited because their income exceeded certain thresholds.
  • A taxpayer’s deduction for state and local income, sales, and property taxes is limited to a combined total deduction. That limit is $10,000, or $5,000 if married filing separately. Any amount above that limit is not deductible.
  • There is also a new dollar limit on total qualified residence loan balances. If your loan was originated or treated as originating before Dec. 15, 2017, you may deduct interest on up to $1 million in qualifying debt, or $500,000 for married taxpayers who file separately. If the loan originated after that date, you may only deduct interest on up to $750,000 in qualifying debt, or $375,000 for taxpayers who are married filing separately. The limits apply to the combined amount of loans used to buy, build, or substantially improve the taxpayer’s main home and second home.
  • The deduction for home equity interest was also modified. Interest paid on most home equity loans is not deductible unless the interest is paid on loan proceeds used to buy, build, or substantially improve a main home or second home. As it was previously, the loan must be secured by the taxpayer’s main home or second home, not exceed the cost of the home, and meet other requirements. Any such home equity loan contributes to the qualifying debt limit of $750,000 (or $375,000 for taxpayers who are married, filing separately).
  • The limit for deductible charitable contributions of cash was also increased to 60 percent of a taxpayer’s adjusted gross income, up from 50 percent in prior years. Thus, generous donors may be able to deduct more of what they give this year. (Related: Using life insurance for charity)
  • A taxpayer’s net personal casualty and theft losses must now be attributed to a federally declared disaster to be deductible.
  • Lastly, the ability to itemize miscellaneous deductions was suspended. Taxpayers are no longer able to itemize deductions that exceed 2 percent of their adjusted gross income.3

Tax penalties

The only thing worse than giving Uncle Sam his due is leaving him a tip.

To avoid a potentially hefty late-filing penalty, you must submit your income tax return on time, regardless of whether or not you can afford to pay.

Indeed, the failure-to-file penalty can be as much as 5 percent of your unpaid taxes for each month or part of a month that your tax return is late, up to 25 percent of your unpaid taxes.

By comparison, the penalty for failure to pay is far less: one-half of 1 percent of your unpaid taxes for each month or part of a month for which your balance is unpaid after the due date, up to a maximum of 25 percent.

If you can’t afford to pay your taxes in full, you can reduce additional interest and penalties by paying as much as you can with your tax return, according to the IRS.

Remember, too, that simple mistakes on your tax return may result in a rejected claim or underpayment of your balance due, which opens the door to late-payment penalties.

According to the government, the most common errors include missing signatures, math errors, insufficient postage, and incorrect identification information such as name, taxpayer identification number, and current address. Others select the wrong filing status, forget to date their return, or check the wrong exemption boxes for their personal, spousal, and dependency exemptions.

Double-check before you file to minimize the risk of costly penalties.

Submitting your tax return electronically ensures greater accuracy than mailing it in since the IRS e-file system flags common errors and kicks back returns for correction.

Tax credits

When it comes to lowering your taxable income, you are your best advocate.

Tax deductions, which reduce the amount of your income subject to tax, are great, but tax credits, which reduce your tax bill dollar for dollar, are even better. So don’t leave any tax credits or deductions for which you are eligible on the table. (Related: Overlooked deductions and credits )

Families with dependent children may be eligible to claim a credit of up to $2,000 per qualifying child under the Child Tax Credit. The tax-reform law increased the modified adjusted gross income phaseout limit for joint filers to $400,000 from $110,000, making it easier for many families to qualify. The phaseout limit for all other filers is $200,000. Additionally, a non-refundable credit of $500 is provided for certain non-child dependents.

If you paid for someone to care for your child, spouse, or dependent so you could work or look for a job, you may be able to claim the Child and Dependent Care Credit. The amount of the credit is a percentage of the amount of work-related expenses you paid to a caregiver, and is based on your income. Total expenses may not exceed $3,000 for one child or dependent or $6,000 for two or more qualifying individuals, and the amount of your credit is between 20 percent and 35 percent of allowable expenses.

Low- to moderate-income taxpayers, especially families, should also check to see if they can claim the valuable Earned Income Tax Credit. For tax year 2019, the maximum credit for those with no children is $529, while those with one child may receive a credit of $3,526, two children $5,828, and three or more children $6,557. To qualify, you must meet certain federal requirements and file a tax return, even if you owe no taxes.

Single taxpayers with adjusted gross income of $32,000 or less in 2019 ($64,000 for married couples filing jointly) may also be able to claim the Retirement Savings Contributions Credit, or Saver’s Credit, which provides a credit up to $2,000 ($4,000 for married couples filing jointly) for amounts they voluntarily save for retirement, including amounts contributed to their IRAs, 401(k) plans, and other workplace savings plans.

Similarly, those paying for higher education expenses may be able to claim one of two tax credits: the American Opportunity Tax Credit, which provides up to $2,500 in tax credits on qualifying education expenses, or the Lifetime Learning Credit, which may be as high as $2,000 per eligible student. You cannot claim both credits for the same student in the same year.

If you haven’t yet filed your tax return for 2019, there’s still much you can potentially do to minimize the amount you may owe.

By taking advantage of tax-favored retirement tools, filing an accurate return, and educating yourself on available deductions and credits, you might just save enough to pay off your credit card debt or catch a flight somewhere warm.

Learn more from MassMutual…

Life insurance: 3 income tax advantages

Building your financial pyramid

Need financial advice? Contact us

This article was originally published in March 2019. It has been updated.

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1 Internal Revenue Service , “Retirement Topics – Contribution,” Nov. 22, 2019.

2 Internal Revenue Service, “2019 IRA Deduction Limits – Effect of Modified AGI on Deduction if You Are Covered by a Retirement Plan at Work,” Nov. 18, 2019.

3 Internal Revenue Service, “ Publication 529 Miscellaneous Deductions,” December 2019.

What is the ‘right’ measure of pension liability?

When having discussions with defined benefit (DB) plan sponsors, financial intermediaries, and many of my “non-actuary” peers, we frequently land on a somewhat technical and confusing question. When determining a plan’s funded status, it’s usually very simple to measure the current value of DB plan assets, but it’s not as simple to arrive at an answer for the liability side of the equation. When someone asks, “what’s my funded status,” the real question should be, “what’s the right measure of pension liability to use?” And, the answer is, it depends.

As we mentioned in our Pension Risk Study, it’s important to help plan sponsors clarify and identify which liability measure is appropriate to use given the situation. Here’s a quick summary of some of the most commonly used measures of liability for a variety of objectives, and the associated calculation bases and assumptions:

  • When determining the required contribution to the plan that will satisfy minimum funding rules, the PPA (Pension Protection Act of 2006) liability is the appropriate basis to use. While initially the liability number for required contribution purposes was determined based on a 2-year average of corporate bond yields, additional relief subsequent to PPA has effectively extended the 2-year averaging period to 25 years.
  • For accounting purposes, the Pension Benefit Obligation (PBO), the liability is determined using a spot rate based on the plan’s cashflows using double-A corporate bond yields.
  • To calculate Pension Benefit Guaranty Corporation (PBGC) premiums, the calculation is similar to the PPA basis noted above with one exception: there is no relief with respect to the averaging period; it remains at 2-years.
  • To measure the liability associated with a plan termination, generally, insurance company annuity rates are the basis to use. However, for plans that permit lump sum distributions, corporate bond yields are also used in the calculation.

Now, although each of these liability calculations is very important and each serves a different purpose, the key is to understand the various measures and uses to ascertain a holistic view of the plan’s finances.

In addition, it’s very important to consider discount rate and yield rate trends when performing financial forecasting. This is best accomplished by obtaining frequent market updates, such as the MassMutual Quarterly DB Market Commentary, and basing forecasts on the most current economic data available.

Here at MassMutual, our team of actuarial consultants are available to provide expert support and guidance to help sponsors and their financial intermediaries navigate this technical subject matter. We’d appreciate the opportunity to discuss ways we can help achieve plan sponsor goals with you. To learn more, please contact us today at DBSales@MassMutual.com or 1-800-874-2502, option #4.