To prepare for a cancer diagnosis and my HSA Account

In October of 2023 I had my first biopsy and in November of 2023 I had my second. Breast cancer, two nodules. Really early diagnosis and small; the best kind of cancer I could have I am told. After much conversation and research, I opted for a bilateral mastectomy -both breasts even if one did not appear to have any cancer. This reduced my chances of future breast cancer from 15 % to 1 % each year. I also opted for reconstruction.

In addition to breast cancer, they found microscopic ductal cancer. That information was scary.

My first surgery was February 2024 and I was home, with limited movement and some pain for 4 weeks and then allowed to start doing some of my daily activities like walking 15minutes a day twice a day and driving. Today I am free to do most activities but am still restricted from big stretching like Yoga..waiting, waiting..

In my previous post, I discussed my HSA medical plan-Health Savings Account with a high deductible medical plan. I am insured as an individual which means I can choose from any individual medical plan available in my marketplace.

I have had an HSA plan for many years- at least 10 years and have contributed the maximum amount to the plan each year. In 2024 that amount is $4150.00. In addition, I made an additional contribution of $1000 as my catch up. I can do this as I am over age 50.My plan in making these contributions annually was NOT to use the contributions until I was closer to social security or have a large medical need. My account is invested in the basic savings account – safe and easy to use if I need it.

I worked with my highly qualified agent when I had the diagnosis in October of 2023 and we were able to move my medical coverage to a new plan effective January 1, 2024, with complete coverage of all preexisting conditions under the law. We confirmed my surgeons and physicians of choice were covered under the plan and that the hospitals in the area were covered at that time.

When it came time to schedule my surgery in 2024, I discovered that my hospital of choice was no longer part of my plan and I found this out a few days from my surgery date when the finance office from the hospital called to advise that I could not have my surgery there. I had been in touch with all my physicians and found that they had received specialty approval due to the recent change of hospital privileges- I advised therepresentative of this.

The finance office of the hospital called me back, agreed that we indeed did have authority to proceed with the surgery and she asked me if I would like to prepay for the surgery and receive a 20% discount! knew once I paid that we were good to go and no one was going to make any changes on me during the final hours to surgery.

Yes, I said and gave her my credit card number. I knew I had the money set aside in my HSA account and could cover the entire cost of my $7500.00 deductible.

I was relieved and happy and knew that my planning and paid off again.

My year of medical expenses

My year of medical expenses

The end of the story first:  I am a breast cancer survivor now.  No additional treatment is necessary, and I am looking forward to completing my reconstruction surgery in October 2024.

Now the rest of the story.

As you may already know, I have been in the financial practice world since I was 22 and am now 63.  I practice what I hope clients will do and I can see the results.  I want this to be a read that gives you some thoughts and some reasons to do the same.

A breast cancer diagnosis can be so scary for so many reasons.  So many questions like what treatment will I need and how will this disrupt my life and how will this affect my spouse are common responses.  These emotional questions are followed by how will I be pay for all this and what will this cancer treatment really cost?

Many people with breast cancer cannot work during treatments or have limited medical leave.  I needed more time to heal than I thought I would. 

In the United States, healthcare and cancer treatment are not guaranteed.  My Health Savings Account with a high deductible medical plan had a $7500 deductible before anything else was paid.  Was I going to need radiation?  Chemotherapy?

I do not have children at home to care for, but I needed help to perform daily tasks.  I could not drive for many weeks, so I was lucky to have John help take me to doctor’s appointments.

I had to purchase specialty clothing for my recovery- clothing to hold the drains coming out of my body.  In the first 6 weeks I had to purchase 4 specialty compression bras. 

The numbers continue to grow with follow-up care.  Cancer care does not necessarily end when your active treatment is done. I may have additional costs from oncologists, diagnostic tests, medications, physical therapy, acupuncture or alternative care and various other exams and tests. 

The blog wwwsurvivingbreastcancer.org has great information.  NPR did a great job reporting about breast cancer in 2022 https://www.npr.org/sections/health-shots/2022/07/09/1110370391/cost-cancer-treatment-medical-debt  and found that patients with cancer are 2.5 times more likely to declare bankruptcy than other adults with health care debt and https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6057727/  30% of cancer survivors report experiencing financial hardship 

The cost of Cancer can be too much. A cancer diagnosis is already too much.  

I was as prepared as I could be. 

Estate and Capital Gains Taxes- What's being proposed and some solutions

Under current law, the first $11,700,000 of assets at the time of death will escape taxation because of a corresponding Federal tax exclusion in the same amount.  Any exclusion amounts not used, can be carried over to a surviving spouse. There appears to be heavy pressure from Congress to reduce this exemption to five to six million or over a 50% reduction in the amount that will escape a 40% estate tax. 

The second major consideration is to significantly change the way capital gain taxes are assessed with even the possibility this tax will be assessed at death and not at the time of a subsequent sale. Currently, a low- cost basis asset will be stepped up to the fair market value at death meaning the beneficiary will have little or no exposure to capital gains taxes depending on when the asset is sold. Additionally, it is being proposed that the capital gains rate of taxation will be increased from the current three tier tax rate (0/15%/20%) depending on taxable income.  These taxes could now be based on the tax rate of ordinary income which could be as high as 37%. 

Not knowing all the particulars other than change will occur with the new administration, there are some planning opportunities to reduce or possibly eliminate this exposure, two of what will be highlighted. 

Property held outside the estate where control is given to a trustee, will escape taxation at death with the only issue that some costs may be incurred at the time of transfer. If an individual sets up an irrevocable trust, that trust can purchase property from the estate using a promissory note. The 2021 IRS interest rate on those notes for less than a 10-year duration are just a little over 1%. Once the property is transferred, the trust then has the income and appreciation which can then be used to pay the interest and the ultimate original loan amount using appreciated assets (asset growth in trust in excess of interest payments). 

In this trust arrangement, no taxes will be associated with the sale to the trust as under specific trust provisions, the sale will be treated as a sale to the grantor. Under this grantor provision, all income tax advantages will pass to the grantor even though the asset is outside of his or her taxable estate. 

Finally, with the grantor trust as described, cash flow from the income generated by trust assets can be used to purchase life insurance, again, outside of estate taxation. With proper drafting, a non-trust beneficiary can be given a special power of appointment that can then be used to withdraw cash values in behalf of the grantor without impacting the estate tax exclusion issues. When you create this leverage and compare it to keeping an asset in the estate with all the issues of appreciation and the resulting estate tax, this can be a significant tool. 

The second planning issue is an income tax issue that can be especially attractive if capital gain taxes increase. Instead of paying a lump sum capital gain tax at a higher income tax rate, consider gifting the asset to a charitable remainder trust where not only a charitable gift can be secured based on a remainder interest, but lifetime cash flow income can be secured with capital gain taxes spread out over a respective lifetime(s). The gift itself is the actual fair market value of the property and not the after- tax value if the property were sold. As with the irrevocable trust as previously described, these enhanced cash flows can then be used to secure life insurance in the amount that might have been passed to the beneficiary absent the charitable gift. 

 For questions and/or applicability of these potential planning techniques, seek out an estate planning attorney or an allied professional who is an Accredited Estate Planner (AEP) as designated by the National Association of Estate Planners. 

Retirement Planning Simplified

After years of practice, I have come to some conclusions as how to bring more simplicity to the retirement planning process.  

So often sophisticated confusion keeps people from taking even the most basic of steps. Unfortunately, far fewer options remain for a 55-year-old vs. somebody starting their planning at an earlier age. 

Many individuals do not understand the basic step of starting to save early vs. later and do not take into account the impact of compound interest.  For an individual starting at age 40, assuming a 6% return, they would need to save $1249/month to create $1,000,000 account balance at age 67.  If that same individual wait until age 50, the monthly savings required is more than double or $2,800/month. Looking at a $70,000/year income, the percent of savings is 21% at age 40 vs 48% of pay at age 50.  

The second issue is not knowing or projecting what the actual account balances would need to be to produce a desired income.  Most planners use an 80% income figure as a percent of final pay. Using the example of $70,000/year, this would equate to $56,000/year of retirement income or $4,700/month. Before a savings balance is computed, other sources of income will need to be factored in to reduce necessary account balances to achieve the target income. Included here would be Social Security, pensions or income that could be produced from other saving such as IRAs. 

Using again the desired income requirement of $4,700/month, if Social Security provided $2,200/month for you and your spouse, the income requirement is now reduced to $2,500/month.  If there was, as an example, a $120,000 IRA, using a withdrawal assumption of 4.0% of the IRA account, the monthly income requirement is further reduced to $2,100/month.  Other income or assets should also be factored in to reduce the necessary monthly income accordingly. 

Assuming the above example of a $2,100 income deficit, assuming no other assets exists, the fund balance to create this amount at a 4.0% rate of distribution and a 25-year period of retirement (age 92 in this example), would require and an account balance of $630,000. This could be higher or lower based on inflation and the actual rate of return. 

Finally, to achieve the necessary account balance requires a monthly savings based on the age that savings begin. If savings were started at age 40 and retirement was age 67, monthly savings at 6% would be $777/month or 13% of pay assuming the $70,000 income figure. 

One a savings goal is determined; one should examine the best way to save. In all probability, a tax deferred account similar to an IRA, or additional deferrals to a 401(k), should first be considered. Pre- tax savings assuming an average combined state and federal tax rate of 20%, will only impact about $620.00 of monthly cash flow to save $777.00.  

Other considerations:  

Once savings goals are established, risk factors need to be addressed.  What happens if you die before savings are realized?   This would impact the income to your spouse or beneficiaries. What if there is a medical event that impacts the required savings or the ability to save in the future. Life insurance and extra savings reserves need to be considered.  

Also, consideration should be given to post retirement income from part time employment. For example, if we assume a 4% rate of withdrawal from an account balance, every $20,000 of post retirement income saves the need to withdraw from a $500,000 account balance (4%x$500,000 =$20,000). This means the $500,000 could continue to grow with interest to a future date.  

If savings goals cannot be accomplished due to time or ability to save in required amounts, goals need to be reduced or retirement should be delayed. A financial advisor can help you better determine where you are and can also suggest other means such as reversed mortgages and/or annuities that might be available.  The key is to start planning today and not wait until your options are far more limited. 

Retirement and Estate Planning

The SECURE Act as passed by Congress in 2020, dramatically changed the way retirement distributions from IRAs and qualified pension plans are distributed to plan beneficiaries. Without getting into details, essentially unless you were an Eligible Designated Beneficiary as narrowly defined, all plan assets would be required to be distributed within 10 years, not over life expectancies. 

 Spouses, minor children under the age of majority, defined as age 25 (deferral to that age, then 10 years), and certain disabled or chronically ill beneficiaries, would be allowed life expectancy distributions with a spouse being able to do a spousal rollover to be governed by his or her required beginning date (age 72).  Also, there was a special exception if the beneficiary was not more than 10 years younger. 

What this essentially means is that income taxes will either be due for amounts withdrawn over that period or for lump sum distributions if deferred to the 10 year maximum. Old rules still apply if you don’t designate a natural person as a beneficiary which could be as little as 5 years if the owner died before the required date (RMD)  of age 72 to start taking account balances. 

Individuals reviewing these new rules may want to gift other assets to help make beneficiaries whole or they may want to start converting traditional IRA accounts to a Roth IRA. With a Roth, taxes are immediately paid on the amount converted but the opportunity is that there would be no required distributions or income taxes to the original owner (if held for 5 years).  Also, the Roth beneficiary would  not be required to pay taxes on distributions although they would be required to start taking lifetime RMDs. 

Although passing legacies on to a Non-Eligible Designated Beneficiaries is now compromised, current estate tax laws have made it much easier to pass on wealth as the current Federal estate tax exemption in 2021 is $11,700,000 with any unused credits at the first death being allowed to carry over to the surviving spouse.  Also, property held until death is automatically stepped up to the to market value at that time to reduce or possibly eliminate capital gain taxes depending on when the property is sold. 

Life insurance as an asset class is now being used to enhance legacy gifts and/or to equalize an estate if one individual may be getting more (example of a business) than another beneficiary.  Life insurance cash values are exempt from creditors, the death benefits are tax free, and the gain over premiums can be substantial. Also, any build-up of cash values is not subject to current taxation during the time of accumulation 

Finally, to address all of these issues, a proper estate plan and a retirement plan need to be in place.  Most Americans are well behind on savings and asset accounts necessary to have sustained retirement. Also, many have not addressed beneficiary designations or how to best use wills and trusts.

In retirement and estate planning I would encourage all readers to seek out a qualified financial wealth advisor. Look for designations of CFP, ChFC, CLU or CPA/PFS.  Also, an individual within the legal, financial, or accounting community that has a designation of an Accredited Estate Planner (AEP) would be highly qualified. Good knowledge and resource information is important in your own decision making and the earlier you start your planning, the more options you will have.