IRMMA and How to Beat It Reviewing the Medicare Surcharge

 I didn't know what Irma was two years ago. 80% of advisors that we run into don't even know what it is. And I feel bad about it. This could have consequences of consumers spending $200,000 plus dollars as a couple in retirement on Irma. The people who know Irma are people 65 and older who are paying the Irma penalty. So what is Irma? It's the... So let's dive into Irma. It's my understanding that you have calculators and lots of resources. And when we first started talking about this, I didn't even have a ton of context of what you were talking about. And I know enough to be like, if I didn't know what this was, I'm guarantee you there's other people out there that don't have a good finger on the pulse. Well, I have to admit that, you know, I'm supposed to be in my space sort of a know-it-all. And I like to be a know-it-all that knows it doesn't know it all. And I have a great team of people. I like true experts on other subjects that I don't consider myself an expert in. And I have to admit that I didn't know what Irma was two years ago. So with my bad advisors book, which everybody thinks is a fun book to read, yeah, I'm making fun of advisors who don't know things. And I have to admit that I didn't know what Irma was two years ago. And I feel bad about it, but, you know, what can I tell you? So Irma is something that people will learn when they get to 65 and we'll want to get into the search matter we can. But through our unscientific poll, because we have a software program called the on point that advisors use to do retirement planning and all sorts of things, we built into it an Irma calculator more recently because we just thought of a such a great tool and there really isn't a good one in the entire industry, which is amazing because if there's a way to make money on software, somebody had already figured it out. There's really no great Irma calculator out there. So we built it and our unscientific poll comes from our team doing software demos from advisors and asking them a question, hey, do you know what Irma is? And our unscientific poll is that 80% of advisors that we run into don't even know what it is. Now this could have consequences of consumers spending $200,000 plus dollars as a couple in retirement on Irma and a retirement planning specialist, financial planner, CFP. They don't even know what it is. Let alone being able to calculate it. So yes, I didn't know what it was either two years ago. Now I not only know what it is, but we build software we can illustrate for clients whether they're projected to have one. But the people who know Irma are people 65 and older who are paying the Irma penalty. So it's really fascinating. And I'm having a lot of fun with it as you can tell, because I love to talk about stuff that people don't know. As long as it's a practical topic that can be helpful. All right. Let's dive into number one, just defining what it is. And it sounds like this affects people 65 and older. And yeah, I'm got my notebook out. I'm ready to write. So Irma, they call it the Irma penalty. That's a little bit of a misnomeric. It's not technically a penalty. So what is Irma? It's the income-related monthly adjustment amount that's the acronym Irma on your Medicare premiums. So I actually talked to you in advisor the other day. And he's like, he said, you know, I'm waiting to 65 to retire because he's getting health insurance through his employer because he works at a trust company. And one of the reasons he was waiting till he got 65 so he got into Medicare because he didn't want to do a private pay insurance. And whether Medicare is good or bad is a whole different issue. Like doctors don't really like Medicare because they don't get paid a lot, but that's what everybody's using. So when you turn 65, you qualify, you sign up for Medicare, part B and part D for Medicare. And there's premiums. I mean, it's like insurance, right? And so there's baseline premiums for Medicare, I think $174 this year's the baseline, but it's means tested. Meaning depending on what you're modified adjusted your income, your Medicare premiums could be different. And people don't know that because people don't think about it. Advisors don't talk about it. And so you turn 65 and you qualify for Medicare, you sign up, you fill out the forms and lo and behold, when you get your first social security check, which everybody knows that everybody knows, well, my social security check when I turn is going to be, you know, 36,000 dollars a year or whatever it is monthly. And then they have an Irma penalty because they have too much of a modified adjusted cost income. And it's automatically deducted from your social security check. Like, hey, I budgeted for the social security check to be X. Now it's X minus Y. So the people who know what Irma is, the Irma penalty, are people 65 and older who are incurring it. Advisors don't know what it is. The people who really I think need to know what it is, are people 55 to 65 because they potentially can do some planning to get around it or to mitigate it or less. So now the interesting thing is you could have upwards of a 300% penalty. Well, I really, if you knew what the number was, like the baseline Medicare Part B, let's say is $174 a month per person. It could be over $500 a month, premium per person, per person. So if you're married, right? You're saying the penalty would be $500 a month per person? The term penalty is a little bit of a misnomerate. It's just a, it's just, you're certain, they call it a surcharge. But and the surcharge gets deducted from your social security. So it's sometimes even hard to see that you're even paying this. It's automatic. That's true. I mean, you could have a person who doesn't really know what they're supposed to be getting paid from social security. And their check is deducting not $174, but $250, $350, and they didn't realize it. So I suppose that's true. I'll put a little ignorance on the notifications that you get from the government. Whether did they send you a letter saying that, hey, you're getting you having a surcharge. I really don't know the answer to that. I do know that it's automatically deducted from your social security payments, though. Yeah, so I went to a financial planner. I'm 55, I'm 58. And I got in my financial planning software, e-money, money guide, pro, whatever else. And here's my great looking retirement plan. Except for what it didn't do, is add a $400 a month per person surcharge to my Medicare premiums. So that's one of the reasons that motivated me to put it in the software, because I wanted to be able to have the most real-world outcome for the consumer. Now, selfishly, I know you have consumers and advisors who watch this. It's a cool tool for advisors. We have a really great one piece summary that an advisor can brand and put their logo and their information on. And we'll just give it to people that are 55 to 65 and see if they want you to run their numbers to determine where they're going to be subject to an Irma penalty. I'm 54. I'm getting there. I've run my own numbers. And I'm probably going to be, well, you're secretly hoping you're going to be subject to an Irma penalty, because that means you have a lot of a Jessica-Ocean income and retirement, right? But then you're like, I really don't want the penalty. What can I do to reduce the penalty? And then, I think insurance agents, mostly are going to grab out on this topic because one of the tools that you're going to use to mitigate the Irma penalty are tools that can create tax-free income or cash loan retirement. So you're going to have cash value life. And I know we're going to do a video on whole life versus AOL. And then you have Roth conversions. Yep. So Roth, Roth, and cash value life insurance loans don't trigger the income in retirement, and which means that you're getting cash flow, but you're not necessarily triggering higher incomes than trigger Irma. Right. So Irma's based on your last two years modified a Jessica-Ocean income. I should have said that earlier as well. So when you're trying to figure out the numbers for somebody who's 55 or 57 or 62 in the software, and we can get into the software just a bit, at some point, just show an example. If I'm only 60, I have to guess in the software what my modified Jessica-Ocean income is going to be the two years before I retire. That's what it's going to use. You're 63 and 64 modified a Jessica-Ocean income to determine whether it's 65 you have the penalty. And then it's going to do it again. It's basically a rolling two-year period. So you could start with an Irma penalty. Like I'm still making really good income at age 63 and 64. 65, a budget of my life so I don't have to have as much income. And therefore my modified Jessica-Ocean income at 65, 66, 67 went down. Our software will calculate all that based on cash flow. Once you get the Irma penalty put in, though, you have to basically send a petition to the government to say, look, I'm not going to have that kind of gross income going forward. And I'd like you to make sure that it's not there. So best to not have it. But then when you have it, there's a few hoops you got to jump through to get rid of it. What is the gross, what's the income number? And I'm assuming with inflation, it's going to continue to go up. Yeah, now that's a good question as well. So if you're single, this is also an important issue. One that you need to be able to illustrate and show and plan for it with a client. So I'm a married couple. I'm in good health. I'm 65. Whether I have the penalty or not, it's one thing. If you're married today to have this penalty at 65 in 2024, you have to have over 200, 6,000 modified a Jessica-Ocean income. So again, if I'm working at a 63 and 64, and I'm making really good income, it's very likely that at a 65, I'm going to have the penalty. Then the question then becomes when you retirement, you really need 206,000 or 258,000 or 332,000 or whatever it may be to get to the next penalty level. So again, for married couples, you can have to make some pretty decent income to get into the earned penalty, especially in retirement. Now again, a few years before retirement, it doesn't take much to have a couple hundred grand of Jessica-Ocean income. Now I'm 65, I'm 68, I'm 72, I'm 78, I'm 81. One of my spouses in bad health. I still have the same amount of Jessica-Ocean income. My spouse passes away. My income is basically still the same as usually the income is fairly static in retirement. And it basically cuts the earned modified of Jessica-Ocean income at half. So now, if I'm single, it's only 103,000 today to get that first threshold. Do you know what I'm saying? So planning and being aware of what's going on and using the right advisor, especially, well, that's the reason the right advisor's always important. So I wrote bad advisors, but the older you get, sometimes it's even more important to have that person on the team that can help you do things and adjust along the way. One of the cool things in the software is, one way to reduce your Irma penalty is to change the way that you take income in retirement. And I can show that an example, but I've got a 401K, I've got an Unclaw fight plan, I've got this, I've got that. If I just change the order in which I take my income or a percentage from this and a percentage from that, you can reduce it, it may not be tens of thousands of dollars, but I'm sort of a block builder, if I can save 5,000 here and 7,000 there. It all adds up. And you said 200,000, is that taking the max, quote unquote, penalty per person, which is 1,000 in line? So yeah, so let's just go through the number. So, you know, your baseline Medicare part B is, let's say, 174 month right now. Yeah. That's your, if you're under 206 and a modified adjusted growth income, if you're a, a married couple, to get to the next threshold is 258,000. So 206 and a dollar, you're not paying 174, you're paying 244. You pay 244 until you get to 258 and modify the adjusted growth income. Then it kicks the next one. I mean, I can share a screen here. I mean, yeah, why don't we go through a case study here? And then is the takeaway, number one, to be aware of it. And then number two, to strategically figure out what includes income versus not. And like my other question is like, how does social security, do they count social security towards your income? Yeah, yeah, they do. So, and again, our software deals us. You can see this is, these are the current brackets. So this, the top one is your married, the bottom one that I circled is your single. So, you know, today to get to that top one, this is for the mega wealthy, right? I've got literally 750,000 dollars modified adjusted growth income in, you know, 65 or older. There are a lot of clients like that or a lot of people like that, but there you go. So, again, you have to just know the client, but then if somebody dies, if one of the spouses passes away, bingo, you get your, you get your amount penalty. So, if I go into the software, you show that screen. And someone that doubles advocate could say that, you know, you're making so much money, what's the big deal? $500, $600 a month. It all adds up and we're going back to the whole conversation around double taxing, like double taxing, taxation. Because social security, you know, like why is that even being mess with? But that's, that's a whole nother question. There's, we could also get into speculation of like, okay, we could talk about now, like where are countries headed? We're going to have to do more things like this for the future. I don't know if you agree or disagree with that, but like if this is a thing today, with where are countries going, what is it going to look like when I hit 55? Well, yeah, I mean, part of the question, so we deal with, we talk about with all the time at advisors is, you know, what is going to be the inflation factor on everything? That goes with Roth conversions, that goes with your income tax brackets, that goes with Irma. Irma is really interesting. If you look at ever since Irma was implemented, the, so we, in the software that you see in here, and then you can see the Irma penalty down here at the bottom, with these red lines, or is the Irma penalty with a total of this particular couple that they're going to have $100,000 Irma penalty? Over their life expectancy. Now the software is built to run numbers to life expectancy. And they got up at the life expectancy at age eight, I don't know if it was nine, you're 91 or something. But to get realistic numbers, whether it be with your retirement plan or your Irma calculation, you have to inflate these numbers. If you keep them static, you get a totally skewed outcome. So Irma, unlike Social Security, Social Security is very linear. I'm sorry, income tax brackets is very linear. So to be in the 10, 12, 15, 18, 20, to 27, 30, whatever tax bracket, today is different than next year, in five years from now, in 10 years from now, in 15 years from now. And if you're not inflating the tax brackets, what you're gonna qualify for, you get a completely skewed outcome. It's very, very linear with income tax brackets. It's 3% a year essentially is how it goes up. If you look at the Irma numbers, they're all over the board. Sometimes they go up. Sometimes your premiums go down. Sometimes your premiums go up. Sometimes the brackets go up. Sometimes it's very non-linear. Our numbers historically have been a point, only a 0.5% increase in premium, and a 0.5% increase in the brackets, which is quite a bit different than your income tax brackets. Now, I've been sad that the last three years have seen massive increases in premiums. So how do you build the calculator in a way that you can accommodate this? And right now we have, have it built where there's an inflation factor here. So you can see that when we're building it, we have to have our projected expenses. Like what do you wanna spend cash when you hit retirement at age 65? And then we have to get, this is a 60 year old client, we have to guess what they're modified in just a gross income as. That's the only way we can do it. And we should have a pretty good idea what this client's gonna make. I mean, they've been found their tax returns for 30 years already. We should have a good idea. And by the way, with the software, you can create multiple fact patterns in seconds so you can change it around. But this is the inflation factor on the premium and the surcharge. So you can change this to 1%, 2%, 3%. And even those software's brand new, we've already come to the conclusion, we need to bifurcate this and split it to premium and surcharge with different inputs. Because my guess is that the brackets are gonna increase slowly, but the premiums are gonna start to spike. So these are inputs that you put in there. But ultimately, this is what the client wants to see what they're output. So getting back to that 55 to 65 year old, well, do you have any idea whether you have a penalty? I don't even know what Irma is. What do you mean, do I know other alpha penalty? Does your advisor know? My advisor doesn't know anything. Okay, great. Let's put the stuff in here. Let's run the numbers. This married couple, Irriga Life Expression, C of A-JD, has a projected Irma surcharge of $101,000 over their life expectancy. Now, it's not millions and millions of dollars, but it's $101,000 of a client that's only got, let's say, 1.5 million dollars in assets. Right? Was this budgeted for with your retirement plan? The answer's no, it wasn't. Well, okay, this client's only 60, maybe there's things we can do that'll change it, right? So the value of an advisor of which, I'm a critic of all, but what does the advisor really doing? Now, if the advisor's hanging around, if I just change the way that I take my money and return to what happens, if I take it from my 401k first in my non-qualify plan, how does that affect the outcome? Now, I've only got an $86,000 penalty. I didn't do anything different. I just took my money in different distribution, in a different distribution manner. What if I did equal distributions? Then I'm gonna go and I'm gonna knock it down some more. Now I'm down to 84. What if I used a Roth conversion? We haven't talked about Roth conversions, but what if I used a Roth conversion? Now that drops it down to 77. Now this client is age 60, right? Now we get a great discussion about when the proper use of cash value life is as an asset class. 60 is sort of my red line number. I don't like to use cash value life for clients over 60 unless they're really, really affluent, which means they're probably never gonna access the money in the first place. You're saying you wouldn't start a life insurance policy if you're over 60. Not a cash value life policy with the idea that I'm gonna take money cash flow from a tax free. Yeah, honestly. Because they're, I'm getting there, I'm 54, I hate to use it term older. When I was 25 and saying those people that a little young guy saying, I'm 54 and I'm saying older is 60, which is unfortunate, but look, life insurance has expenses. And while you can design the policy properly, you really ought to let it cook for 10 to 15 years before accessing the cash. I know that's anti-banking yourself and all that other good stuff, but we use it for cash flow in retirement. So we roll at it. But let's say this is a little bit more affluent client, they can afford to take 75,000 out of their brokerage account. In my retirement assets, I got 800,000 dollars in a brokerage account, a million dollars in a tax for IRA, and a million at 400 grand in a Roth. What if I transitioned 75,000 from the brokerage account into a UL, just my favorite type of policy? And then we rerun their number. Now I'm down to 62,000. So I started at 100. Now it's not that simple because you also have to go to the cash flow chart and determine whether when we add the IOL, 100 and affect our cash loan retirement. So we don't add it just to avoid their mopedaling and run out of money. And run out of money to your zero. Just zero moped, I don't know the, but we just wiped out all your income. Exactly. Right, yeah. But it's all compounds. These are the things that are like, take Roth conversion. I know that we'll either do a video or a whole series on this. You have some amazing thoughts and software around this as well. The reason you do the Roth conversion is to save money, I believe, on the back end, pay less in taxes. And this is just another tax that you're foregoing. But if it just was like, Irma is just one legal block in a lot of different consequences. But it all adds up. And when you factor an opportunity cost to set you more than just 100,000, it's like, what could that 100,000 be worth if it wasn't drained and just gone? Right. And thankfully our software takes all of that into account and shows you what your, the asset value at any particular age is based on the planning you were doing. So did you do a Roth conversion? And that'll be a fun, you know, series of videos or video because, you know, I saved 55,000 dollars in taxes, but I had 100,000 dollars less for my errors. Right. Well, it's great. You saved on taxes, but you passed 100,000 dollars less to your errors. Most Roth conversion software, I would say almost all of them don't take into account the Irma panel. So I ran my Roth conversion software with my financial planner and they told me I needed an annuity and all this great stuff. But they didn't calculate the 100,000 dollar Irma penalty when you did the Roth conversion. Right. So those are the things that we try. I've tried over the years to put out intellectually honest stuff whether it be in writing in books with real numbers instead of the fluffy books that everybody else puts out that are basically just sales books. But then with the software to be able to run those numbers and help the advisor, you know, really dig deep with the client to make sure that they're doing the right thing for them. Yeah. So here's the call to action. And if you have any final thoughts, be sure this after. If you are a consumer, if you're watching this and saying, hey, I'm nearing retirement, right? I have my parents earning retirement or there's people I know that need to know this. We'll have resources down below if you're interested in talking to Rocky or someone on his team will have a link. And if you're an advisor and you're like, hey, I want to, this on point software, like this, it sounds interesting. I want to learn more about maybe potentially offering this service to my clients. We'll also have a link down where you can either talk to Rocky or someone on his team about what that would look like using those resources. Rocky, is there anything else that you want to say as it relates to Irma not like, again, it's not like the most exciting, sexy topic, but it's one of those things that people need to be aware of. And it just comes down to when we talk about planning. It's not just a, this is simple, this or that. It's like, there's a, it's complicated, which means if you're not using some type of software, like on point, you're probably overlooking something because there's a lot, these things get complicated and Irma's a perfect example of something that a lot of people are overlooking until it's too late. Yeah, I mean, Irma, this is a classic example. And myself included, I said until two years ago, I wasn't familiar with Irma. I think it's gonna become a bigger, bigger problem. The government's gonna need more money. They're setting the premium levels and the income levels to get into the penalty box, if you will. So yeah, if you're an advisor selfishly, it's a great topic because almost 100% of the people you talked to between 55 and 65 aren't gonna know what it is. Once you bring it up and explain it to them, they should, they should want their numbers around to see whether they're gonna be potentially subject to it. And then if you're a good advisor, you know what you're doing. You're not gonna be able to help everybody, but you'll be able to plan around it a little bit, whether it be with Roths, whether it be the cash fair life, whatever it may be to help those consumers get to the best spot. If you're a consumer watching this, ask your advisor if they know what Irma is. Chances are nearly 100% that they either don't know what it is or maybe know what it is, but have no idea how to calculate it. You could let them know about our software, but if you want your own numbers run, it literally takes us five minutes through on the numbers. So now I'll just power is really my calling card. So when you know what you're doing, you'll ultimately get a better outcome. Rocky, thank you. And I look forward to doing more videos with you and diving into deep specific topics that some people have never heard of. So thank you. Thank you.