John P. Bryson

Hello and welcome to the Portfolio Intelligence Podcast. I'm your host, John Bryson, head of investment consulting and education savings here at John Hancock Investment Management. Today is November 11, 2024. And I'd like to start by saying thank you for your service and sacrifices to all the veterans out there. We are extremely proud of you and appreciate you. Now onto the content.

In 2024, approximately 1.4 million Americans are poised to turn 65, and this will continue every year through 2027. Dubbed by many as the Silver Tsunami, the figure represents the largest surge of retirement age Americans in history. With this wave of retirement, many will shift their healthcare coverage from their employer-sponsored plans to Medicare. Financial professionals can play a key role in helping individuals understand the options and complexities of choosing or delaying their Medicare choices.

 

To discuss this topic, I've invited Danielle Roberts to the portfolio Intelligence podcast. Danielle is a founding partner at Boomer Benefits and is the author of the bestselling book, 10 Costly Medicare Mistakes You Can't Afford to Make. A recognized Medicare insurance expert. Danielle is a frequent speaker for both agent and consumer groups. She has appeared on more than 200 podcasts, radio shows, and television programs to discuss Medicare.

She writes for several major publications and has conducted hundreds of seminars and webinars about Medicare that have educated hundreds of thousands of people. Danielle is also the exclusive provider of Medicare educational webinars for us here at John Hancock Investment Management. Danielle, welcome to the podcast.

 

Danielle K. Roberts

Well, thank you very much for having me. I’m excited for our conversation today.

 

John P. Bryson

Excellent. So, for our listeners that don't know a lot about Medicare, can you just give us a brief overview of things they should know?

 

Danielle K. Roberts

Sure. So Medicare is the health insurance provided by the federal government for people who are aged 65 or older, and also people with certain disabilities under age 65. It is separate and distinct from Medicaid, which is insurance for people who have low income. So it's actually possible that you could have both Medicare and Medicaid. Medicare was created in the 60s.

It was signed into law by, President Lyndon Johnson. And at that time, they modeled Medicare after the old Blue Cross and Blue Shield style of insurance, where you have hospital on one side and outpatient on the other. And so original Medicare or traditional Medicare includes both hospital and outpatient insurance. And then, of course, the program has evolved over the years.

So today we have a Medicare Part C and D as well. Part C is the Medicare Advantage program, which I'm sure we'll talk about. It’s an optional way to get your Medicare benefits through the insurance company instead of from the federal government. And then Medicare Part D is the newest part of Medicare rolled out in 2006. And this is coverage for outpatient prescriptions.

So once you’ve signed up for Medicare and you have your A and B in place, you can choose whether or not you would like to enroll in a part C advantage plan, or if you wanted to enroll into outpatient coverage for prescriptions. And people will make separate and distinct decisions about this because everyone's situation will be different. So, I'm sure we'll talk today a little bit more about how to make those choices and when you can make them. Knowing that Medicare has election periods, one of which we’re in right now.

 

John P. Bryson

Excellent. Great set up for the conversation. So you mentioned election period. That's something we're hearing a lot about right now. So why are we hearing about it so much?

Danielle K. Roberts

So, once people are enrolled in Medicare, they don't have to re-enroll in Medicare itself. But there are types of coverage that are voluntary, coverage like Medicare Part C advantage plans and Medicare Part D drug plans. And because these are voluntary, they limit the times of year when you can make changes to them. So if you are in the period of October 15^th to December 7^th on any given year, you can use this as a time to change your enrollment in your Medicare Advantage plan to go from original Medicare to Medicare Advantage or back, and you can also enroll in or change Medicare Part D drug plans.

So these two types of products don't have any kind of underwriting. So just like with the ACA legislation, they limit this enrollment period to a certain block of time—seven weeks every fall. And this is when 67 million people are all trying to make changes to either Medicare Advantage or Part D.

John P. Bryson

That's really helpful to know. And I would say to our advisors that listen to the podcast now might be a good time to reach out to those clients, give them the reminder that the window is closing. All right. Let's get into … let's get into some more details. Talking about financial professionals. What do financial professionals need to know if their client is planning on working past age 65? Because we're hearing about this more and more, does their employer coverage coordinate with Medicare?

 

Danielle K. Roberts

Yeah. Great question. Because we have so many people out there working into their 70s and even 80s today. And so, people want to know, am I required to enroll in Medicare? How do I go about enrolling in Medicare? Do I need to decline Medicare? And so it's likely that these are the types of questions that they will bring to their financial advisors.

So whenever someone is turning age 65, if they are continuing to work past age 65, what they do with Medicare will depend on the size of the employer that that insurance is coming from. So, if an individual is still working actively for a large company, which is any company with more than 20 employees, that company health insurance is actually going to be primary and Medicare is secondary.

So in that scenario, what we often advise is that folks can enroll in just Medicare Part A, which is your hospital coverage. This coverage cost zero for most people because they've paid into the program all their working life via FICA taxes. So you can have your Medicare Part A hospital coverage, coordinate with their group health coverage, and this could greatly reduce your spending in the event of a hospital stay.

However, you don't need to enroll in Medicare Part B and D because your group health insurance from your employer already includes Medicare. Sorry, already includes outpatient coverage and drug coverage. So rather than signing up and having to pay premiums for that, a lot of people will delay that. Now, one caveat to that is because some people today have employer insurance that is a high deductible health plan that is compatible with health savings accounts.

And if you're still working for a large employer and you want to keep contributing into that, HSA plan, then you need to delay all the parts of Medicare, including part A, because the IRS says you cannot continue contributing into a HSA plan if you have any other form of insurance besides that high deductible health plan. And of course, Medicare Parts A and B, those are a form of insurance.

So assuming that the advisor is working with someone that is working for a large employer, they would advise one of those two routes either part A only or delaying all of those parts of Medicare. On the flip side, if you work for a small employer with less than 20 employees, then Medicare is primary and that group health insurance is secondary.

So you for sure want to sign up for Medicare Parts A and B right when you turn 65 so that you are not lacking your outpatient coverage that is primary. And so, we don't want to be in a scenario where someone doesn't realize this. They fail to sign up for A and B, now they need a surgery. And rather than part B paying 80% of their expenses, they have to come up with that money out of pocket.

So knowing that employer size is really important when advising people what to do on working past age 65.

John P. Bryson

Okay, so let's continue this. If a client is working for a large employer of more than 20 employees and they can delay coverage, is there anything that they need to do to refuse that?

Danielle K. Roberts

No, because if you are not taking Social Security already, then you won't be auto-enrolled into Medicare. So everyone has a seven month window when they become eligible for Medicare. And this is a seven-month window that surrounds your birthday. So, it starts with three months before it goes through that birthday month, and then it goes for three months after.

So during that window, you would go ahead and initiate your own enrollment into Medicare. However, if you started your Social Security prior to age 65, then you will actually be auto-enrolled in your Medicare card will just show up in the mailbox 1 to 2 months before you turn 65. However, people that are planning to still work generally are not signing up for Social Security.

They're delaying that. And so therefore, when they turn 65, they won't be enrolled into Medicare and they won't have to do anything to do that. And if for some reason, you’ve got a Medicare card in the mail and you didn't sign up, then you would contact Social Security to let them know that you're still working and you plan to deny that coverage for now.

John P. Bryson

Okay. So, kind of one more question around the large employer. Once the client eventually does retire, they've extended it, but they do. When and how do they go about registering for Medicare?

Danielle K. Roberts

Yeah. So they're going to enroll in Medicare in a little different process than if they were signing up at 65. There's two pieces that they will need to complete. One is an application for part B, which you can get from the Social Security website. You can complete that and upload it to them. And then the second part is an employer verification.

So you are going to need that employer that you've been working for since you turned 65 to complete a form, testifying that you have had that large employer coverage or you've had employer coverage since turning 65 so that Medicare knows not to assess any late penalties for you. And this is something that a lot of people on the back end are not aware of, that want to go online and try to sign up.

But when you're enrolling past age 65, it's best to do those two separate applications. Have your employer verification completed by that employer, and then upload those to the Social Security office. And we're lucky that we can do that today by the way. You used to have to take that paper down to the local social security office in person. But today, it's a lot easier to do so.

John P. Bryson

Wow. And that's great insight. That's why we had this podcast to kind of avoid the gotcha moments later on. So thanks for sharing that. You mentioned parts of A, B, C, and D I want to dig into D. I hear there's some changes going on to the prescription drug coverage beginning in 2025, which is right around the corner. Can you expand on what changes clients can expect? Both the pluses in the minuses?

Danielle K. Roberts

Sure. So Congress passed some legislation back in 2022 that made some changes going forward to the Medicare Part D program. And so, for many years, Medicare Part D had several different stages, one of which was a coverage gap or called the donut hole where your medications might get more expensive once you were in that window. In 2025, the gap is gone.

So now we have just three stages of Medicare Part D. There is a deductible that you pay upfront which is going to be $590 in 2025. And then after that, you will have your initial coverage level where you're paying a portion and your insurance company is paying a portion. But if you come out of pocket $2,000 on medications during the year 2025, then afterwards you reach the catastrophic coverage level of the plan, at which point the insurance company, in combination with Medicare and drug manufacturers, covers everything beyond that point.

John P. Bryson

Everything beyond that point. Okay.

Danielle K. Roberts

Yeah. And the big thing about this is that it used to be that there was an $8,000, and here in 2024, that cap is at $8,000. So just imagine how that legislation brought that down to 2000, and how beneficial that would be for people taking a lot of expensive medications to have that cap to look forward to.

I think this is a really important point to make. However, one of the negative things you asked about, “is there anything negative?” is that when all these changes were made, we saw the insurance companies come out with bids for Medicare Part D that would have been outrageously expensive. And now that insurance companies have to cover a bigger piece of that pie, these premiums could have gone up quite a bit.

And some of them did. But CMS stepped in with a premium stabilization program which basically gives those insurance company companies a subsidy to help keep that premium lower. So at least for this year and 2025, we have some very reasonably priced drug plans. I do always recommend that when you're looking at a drug plan, it's very important to determine which drug plan out there covers the medications you take at the lowest cost.

So it's not a good idea just to sign up for any part D plan that has a really low premium. We want to make sure that we're choosing one that is going to be the best needs for the specific medications that you take. It's really important to make sure to check the drug formula of any plan that you're getting ready to enroll in because an inexpensive drug plan isn't going to help you if it doesn't cover a medication that has a retail cost of $400.

So, this is something people can, search themselves on Medicare.gov. They can take a look at which drug plans out there, cover the medications they have, or they, of course, can work with agents like us here at Boomer Benefits and we can run those analysis for them. But just one really important point there that we don't want to just go with whichever coverage is cheapest. We want to make sure that coverage has the medications we need at a reasonable price we can afford.

John P. Bryson

Again, another great gotcha to avoid. We're always talking about planning as usually it's financial planning and you mentioned premium. Let's … let's talk about that. Is there a rough estimate, of overall Medicare costs? One can anticipate once they enroll, in Medicare, and at age 65?

Danielle K. Roberts

Well, their cost for Medicare will actually depend on their income. And so this is one of the best areas where financial planners can really help people to plan for those costs. So Medicare Part A, we mentioned, has a zero premium for anyone that has worked ten years in your lifetime here in the U.S. and paid five for taxes, but Medicare Part B and D, they have premiums that you pay while you're enrolled in that insurance.

So, Medicare Part B in 2024 has been $174.70 a month. That's a standard base premium that most people pay and this is going up in 2025 to $185. And that … the you will have most people paying that standard-based premium. Some people may pay less if they are very close to the federal poverty line to where they have Medicare and Medicaid … and this Medicare savings program steps in to help pay for part of those premiums.

But probably more often, folks listening to this podcast are going to be working with people in the other end of the spectrum, which is people that have higher incomes. So when someone is enrolling in Medicare for the first time, the IRS has your tax return on file for all the years that you've worked in the past and Social Security Office will go in and do a two-year look back. They're going to be looking to see what were you earning two years ago, and what did you file on either your income tax return as a single filer or a joint filer.

And if you are in a higher wage bracket, then you will actually pay more for Medicare. And this will be done by a benefit determination letter that they send you in the mail saying, “hey, we took a look at your income from two years ago, and we see that you earned higher than what we consider the basic wage.”

And so they can adjust what's called an income related, a monthly adjustment amount, or IRMAA for short. And this is an additional premium that you pay on top of the standard-base premium based on your income. So, there are several levels within that group and you could find somebody in the highest brackets that might pay $600 … around $600 a month for their Medicare Part B.

So one thing I also like to point out is sometimes when people are turning 65, they've retired. But two years ago, on that tax return that Social Security is looking at, you actually earned more because you were still working. But fortunately, there is a process that you can use to appeal that premium. So you could appeal and say I have retired or I have gone from full time to part time.

Maybe your income changed from … due to marriage, divorce, death of a spouse, or so of an income producing property. So all of those are ways that you can appeal that premium with Social Security and potentially have it lowered immediately, instead of you having to wait those two years for that to catch up with you. And this … this leads me to one really important point, which is decisions that people make with their money when they are 63 and 64 will absolutely affect their Medicare Part premiums, Part B premiums, when they are 65 and 66.

So financial planners can be really important in determining that. There are charts that they will be able to estimate with their client. So, taking a look at that income two years ago or what that person is going to be earning when they're 63. Your financial advisor could forecast the potential IRMAA, based on today's numbers at least, what that person would pay for Medicare Part B, and then also Part D. We have been using a ballpark average of $55 for a part D drug plan in 2024.

You may have a drug plan for you that works that's less expensive or more expensive, but that's a good ballpark number to just … to put on the dotted line when you're just trying to forecast your future expenses. So, a financial advisor would be able to go over with their client what Medicare Part A is for most people, which is zero.

Part B, $185 … could be more if you own IRMAA, and then Medicare Part D will have its own premiums based on whichever drug plan you choose, as well as an IRMAA that's added to Part D. And all of these working parts are just the basic foundation coverage, not even including what someone might spend to, say, add on a Medigap plan.

So you can see, of course, how that planning process with the financial advisor is just so important, so that people don't go into Medicare being unprepared for the costs.

John P. Bryson

That's really helpful. So there's a lot of moving parts. Are there any other considerations that you have a financial professional share with their clients in terms of overall monthly expenditures to … to get ready for?

Danielle K. Roberts

Yeah, for sure. So, one thing is to know is that Medicare does not cover long-term care. So although if you were in an assisted-living facility or in a nursing home, if you need medical care on an inpatient or outpatient basis, of course Medicare is still going to cover that. But it does not cover the rent to live in a facility like that.

So for sure, with their financial planner, they need to be looking at options for either long-term care insurance or, putting enough away money away for a potential long-term care … say that is one really important consideration. And then the second thing is, if someone doesn't have retiree coverage and Medicare is just their basic part A, B coverage, then they're going to either be adding on a Medigap plan or a Medicare Advantage plan to sort of fill in some of the gaps because Medicare does not cover everything just like health insurance under 65.

There are premiums that you pay and then there's deductible co-pays and co-insurance that you pay as you use those benefits. And so, assuming like, on the outpatient basis, Medicare only covers 80%, we want to have some sort of additional coverage in place to pick up that 20% and to pick up the deductibles, co-pays, and co-insurance that affects Medicare Part A as well.

So, when someone is choosing between a Medigap plan and a Medicare Advantage plan, the premiums are quite different. And something they should know if they go the Medigap route, is that those premiums that you start with, you can expect an increase on those, usually of about 13% to 15% per year. So if someone is forecasting what they're going to spend, you want to know about, rate increases that happen with Medigap plans.

And so that's something that you want to look at whether you can afford now and would you be able to afford it, say, 10 years from now, knowing the way that the rates go up.

John P. Bryson

So, I want to dig in is a little bit more the Medicare, the Medigap plan versus the Medicare Advantage plans offer. If a client goes to their financial professional, is not sure whether to get one or the other, what are some of the pros and the cons they need to consider for each of these?

 

Danielle K. Roberts

Yeah, that's a great question and it's a very common question. At Boomer Benefits we have a Facebook group for Medicare beneficiaries. We've got about 95,000 people in it. And in that Facebook group, anyone can come in and ask their Medicare questions. So we have a lot of beneficiaries in there, and that is actually the number one question that we get is what's the difference between a Medigap plan and a Medicare advantage plan.

And you know, how do I make this … this choice? Because people are afraid of making a mistake. You know, they don't want to have some … coverage that doesn't cover them when they need it. So the best way to think about Medigap plans is that you are adding that to your Medicare coverage. So you're still going to get your benefits from original Medicare.

And then you would add on a Medigap plan to help pay for those deductibles, co-pays, and co-insurance and the type of healthcare services that otherwise you would pay. So Medicare gets a bill, Medicare pays its share, sends the remainder not to you, but to that Medigap plan which will pay its share. And then you only get a bill in the mail if there's something left over.

Medigap plans are … have higher premiums upfront, but you have lower and more predictable cost sharing on the back end. And so, this is something that some people really like. And then another really important piece of the Medigap coverage is that the only question you have to ask your doctor is, do you accept original Medicare? And if the doctor says yes, it doesn't even matter which Medigap plan you enroll in, they will all be available to you.

And a lot of people like the idea of having coverage like that, where they can see any doctor in the United States, any provider that accepts Medicare. So you have access to over one million providers. You don't have to choose a primary care doctor. You don't have to get a referral to see a specialist. And so, that freedom of access is really one of the main selling points of the Medigap plan.

But as I mentioned, they have premiums upfront and then rate increases from year to year. So, back in 1997, the Balanced Budget Act was signed into law by Bill Clinton and this created the Medicare Advantage program that we know today, which is simply an option to … maybe you have someone out there that would really like a Medigap plan but they cannot afford one, or they can't qualify for one if they miss their additional open enrollment for one.

And so they created Medicare Advantage plans as an option for those folks to also get coverage but Medicare Advantage pays instead of Medicare. So instead of adding a Medigap plan to original Medicare, when you enroll and run a Medicare Advantage plan, you are actually going to get your Medicare Part A, B, and D benefits through that Medicare Advantage plan.

And this is a Medicare Advantage plan. The simplest way to put it is it's very similar to group health insurance you've had all of your life. An insurance company comes into an area, they contract with a bunch of providers, and those providers provide discounted rates to the members of the plan. So when you enroll in the Medicare Advantage plan, you're going to actually have a network that is going to be based there in your local area.

Maybe it has 10,000 to 15,000 providers as opposed to original Medicare, which would provide over a million providers. But most people are used to this. They're used to having a network close to home from all their working years, and that we see doctors and hospitals in that network to get the best pricing. So Medicare Advantage plans are actually much, much cheaper than Medigap plans because when you enroll in a Medicare Advantage plan, the original Medicare is actually paying that Advantage plan for it to take on all of your health risk.

And so the Medicare Advantage plan will offer the lowest possible premiums, often zero premiums, to attract people to the plan so that they can get paid by Medicare. And these plans, they get over $1,000 a month or more from Medicare. It's going to vary a little bit based on whether they have quality bonuses that they can qualify for.

But if a company can enroll someone in the plan and provide a network for them, have those discounted cost available, and they don't use up, say, more than $12,000 and $15,000 a year in premiums that they're getting paid by Medicare, then they would be making money on a plan like that. And so Medicare Advantage plans have really proliferated because, of course, there's always more healthy people than sick people out there.

Lots of people are interested in joining a Medicare Advantage plan that has a zero premium, and then they just pay for their services as they go. So with a Medicare advantage plan, your agent will go over a summary of benefits with you upfront. And in that summary of benefits, it will list all the different types of healthcare services and what those services will cost you.

So you might have a plan that say, has a $5 co-pay at the primary care doctor, maybe a $25 copay at the specialists. Perhaps if you were to go to get an MRI, you would pay 10% of the cost. So with Medicare Advantage, you're going to pay those healthcare services as you go because you're not getting your care directly from original Medicare anymore.

You're going to get it through that network. And Advantage plans typically have networks that most Americans are going to be really familiar with. So an HMO plan is going to be a little more restrictive. Often you are choosing your primary care doctor. You may have to get a referral to see a specialist. And typically, there is no coverage outside the network except in emergencies.

So these really work best for people that want to be in a plan that's going to be close to home. You're not planning on traveling to get your care. There are also Medicare Advantage PPO networks where you could see a doctor outside the network as long as they were willing to bill the plan, and you are just going to know that you'll pay more for out-of-network coverage, just like you're used to having done all your life, through your health insurance plans.

And of course, there's so much more I could go into with all of the pros and cons and differences, but that's just sort of a 50,000-foot view of the two types of coverage and how they work.

John P. Bryson

Great. You know, Danielle, you're doing a great job of taking a complicated subject to make it easy for us. But there's a lot. A common question we hear is, you know, is there somebody I can sit down with? Is there a Medicare broker? Is it worth the money because it costs money. Can you shed some light on that subject so our financial professionals are best equipped to answer these types of questions.

Danielle K. Roberts

Yes, you are right. It's a very common question. So, when someone is working with a Medicare broker like Boomer Benefits, our service is 100% free to your client. So we will help your client review a whole bunch of different options from, you know, 12, 15, 20 different insurance companies for whatever type of coverage they're interested in and whichever plan they ultimately choose, that carrier or plan will pay a commission to your agent.

And when you enroll this way, the great thing about working with a broker is not just that it doesn't cost the client anything, but then they have someone on the back end for the inevitable hiccups that happen with Medicare. You know, sometimes a bill will get misquoted properly and Medicare will deny all of the claims. And so your client will end up with a bunch of bills and they don't understand why they're getting them or what they should do about them.

They're not sure if they should call the insurance company or Medicare or the provider. You'll also run into things like prior authorizations and drug exceptions and late-penalty appeals. And those are all the things that a broker provides. So when you have a good broker that you have put your business with, that broker is not only going to help you sign up for your coverage initially, but is going to support you on the back end with a strong and quality, customer service line that either that broker or their team, like ours at Boomer Benefits handles, so that you are not on the back end of Medicare.

Not understanding something that happened and not knowing where to go for help, your broker would be your very first call. And of course, in … in cases like our team at Boomer Benefits, we know we have a 75-person team that deals just directly with our existing policyholders to help them through all of those ordinary questions you have on the back end.

So it's a great way to make sure that your clients are going to have really good support as opposed to if they enrolled directly with an insurance company, they don't have a broker. They would handle those things on the back end on their own.

John P. Bryson

We are big believers in expert advice on the Portfolio Intelligence podcast. We think building a partnership with experts that can really help you grow your business is critical. Danielle, I want to thank you for joining us today. Really insightful. Really appreciate your time.

If you want to hear more, please subscribe to the Portfolio Intelligence podcast on iTunes. To read our viewpoints on macro trends, portfolio construction techniques, or business building ideas like you heard today and much, much more.

As always, thanks for listening to the show.John P. Bryson

Hello and welcome to the Portfolio Intelligence Podcast. I'm your host, John Bryson, head of investment consulting and education savings here at John Hancock Investment Management. Today is November 11, 2024. And I'd like to start by saying thank you for your service and sacrifices to all the veterans out there. We are extremely proud of you and appreciate you. Now onto the content.

In 2024, approximately 1.4 million Americans are poised to turn 65, and this will continue every year through 2027. Dubbed by many as the Silver Tsunami, the figure represents the largest surge of retirement age Americans in history. With this wave of retirement, many will shift their healthcare coverage from their employer-sponsored plans to Medicare. Financial professionals can play a key role in helping individuals understand the options and complexities of choosing or delaying their Medicare choices.

 

To discuss this topic, I've invited Danielle Roberts to the portfolio Intelligence podcast. Danielle is a founding partner at Boomer Benefits and is the author of the bestselling book, 10 Costly Medicare Mistakes You Can't Afford to Make. A recognized Medicare insurance expert. Danielle is a frequent speaker for both agent and consumer groups. She has appeared on more than 200 podcasts, radio shows, and television programs to discuss Medicare.

She writes for several major publications and has conducted hundreds of seminars and webinars about Medicare that have educated hundreds of thousands of people. Danielle is also the exclusive provider of Medicare educational webinars for us here at John Hancock Investment Management. Danielle, welcome to the podcast.

 

Danielle K. Roberts

Well, thank you very much for having me. I’m excited for our conversation today.

 

John P. Bryson

Excellent. So, for our listeners that don't know a lot about Medicare, can you just give us a brief overview of things they should know?

 

Danielle K. Roberts

Sure. So Medicare is the health insurance provided by the federal government for people who are aged 65 or older, and also people with certain disabilities under age 65. It is separate and distinct from Medicaid, which is insurance for people who have low income. So it's actually possible that you could have both Medicare and Medicaid. Medicare was created in the 60s.

It was signed into law by, President Lyndon Johnson. And at that time, they modeled Medicare after the old Blue Cross and Blue Shield style of insurance, where you have hospital on one side and outpatient on the other. And so original Medicare or traditional Medicare includes both hospital and outpatient insurance. And then, of course, the program has evolved over the years.

So today we have a Medicare Part C and D as well. Part C is the Medicare Advantage program, which I'm sure we'll talk about. It’s an optional way to get your Medicare benefits through the insurance company instead of from the federal government. And then Medicare Part D is the newest part of Medicare rolled out in 2006. And this is coverage for outpatient prescriptions.

So once you’ve signed up for Medicare and you have your A and B in place, you can choose whether or not you would like to enroll in a part C advantage plan, or if you wanted to enroll into outpatient coverage for prescriptions. And people will make separate and distinct decisions about this because everyone's situation will be different. So, I'm sure we'll talk today a little bit more about how to make those choices and when you can make them. Knowing that Medicare has election periods, one of which we’re in right now.

 

John P. Bryson

Excellent. Great set up for the conversation. So you mentioned election period. That's something we're hearing a lot about right now. So why are we hearing about it so much?

Danielle K. Roberts

So, once people are enrolled in Medicare, they don't have to re-enroll in Medicare itself. But there are types of coverage that are voluntary, coverage like Medicare Part C advantage plans and Medicare Part D drug plans. And because these are voluntary, they limit the times of year when you can make changes to them. So if you are in the period of October 15^th to December 7^th on any given year, you can use this as a time to change your enrollment in your Medicare Advantage plan to go from original Medicare to Medicare Advantage or back, and you can also enroll in or change Medicare Part D drug plans.

So these two types of products don't have any kind of underwriting. So just like with the ACA legislation, they limit this enrollment period to a certain block of time—seven weeks every fall. And this is when 67 million people are all trying to make changes to either Medicare Advantage or Part D.

John P. Bryson

That's really helpful to know. And I would say to our advisors that listen to the podcast now might be a good time to reach out to those clients, give them the reminder that the window is closing. All right. Let's get into … let's get into some more details. Talking about financial professionals. What do financial professionals need to know if their client is planning on working past age 65? Because we're hearing about this more and more, does their employer coverage coordinate with Medicare?

 

Danielle K. Roberts

Yeah. Great question. Because we have so many people out there working into their 70s and even 80s today. And so, people want to know, am I required to enroll in Medicare? How do I go about enrolling in Medicare? Do I need to decline Medicare? And so it's likely that these are the types of questions that they will bring to their financial advisors.

So whenever someone is turning age 65, if they are continuing to work past age 65, what they do with Medicare will depend on the size of the employer that that insurance is coming from. So, if an individual is still working actively for a large company, which is any company with more than 20 employees, that company health insurance is actually going to be primary and Medicare is secondary.

So in that scenario, what we often advise is that folks can enroll in just Medicare Part A, which is your hospital coverage. This coverage cost zero for most people because they've paid into the program all their working life via FICA taxes. So you can have your Medicare Part A hospital coverage, coordinate with their group health coverage, and this could greatly reduce your spending in the event of a hospital stay.

However, you don't need to enroll in Medicare Part B and D because your group health insurance from your employer already includes Medicare. Sorry, already includes outpatient coverage and drug coverage. So rather than signing up and having to pay premiums for that, a lot of people will delay that. Now, one caveat to that is because some people today have employer insurance that is a high deductible health plan that is compatible with health savings accounts.

And if you're still working for a large employer and you want to keep contributing into that, HSA plan, then you need to delay all the parts of Medicare, including part A, because the IRS says you cannot continue contributing into a HSA plan if you have any other form of insurance besides that high deductible health plan. And of course, Medicare Parts A and B, those are a form of insurance.

So assuming that the advisor is working with someone that is working for a large employer, they would advise one of those two routes either part A only or delaying all of those parts of Medicare. On the flip side, if you work for a small employer with less than 20 employees, then Medicare is primary and that group health insurance is secondary.

So you for sure want to sign up for Medicare Parts A and B right when you turn 65 so that you are not lacking your outpatient coverage that is primary. And so, we don't want to be in a scenario where someone doesn't realize this. They fail to sign up for A and B, now they need a surgery. And rather than part B paying 80% of their expenses, they have to come up with that money out of pocket.

So knowing that employer size is really important when advising people what to do on working past age 65.

John P. Bryson

Okay, so let's continue this. If a client is working for a large employer of more than 20 employees and they can delay coverage, is there anything that they need to do to refuse that?

Danielle K. Roberts

No, because if you are not taking Social Security already, then you won't be auto-enrolled into Medicare. So everyone has a seven month window when they become eligible for Medicare. And this is a seven-month window that surrounds your birthday. So, it starts with three months before it goes through that birthday month, and then it goes for three months after.

So during that window, you would go ahead and initiate your own enrollment into Medicare. However, if you started your Social Security prior to age 65, then you will actually be auto-enrolled in your Medicare card will just show up in the mailbox 1 to 2 months before you turn 65. However, people that are planning to still work generally are not signing up for Social Security.

They're delaying that. And so therefore, when they turn 65, they won't be enrolled into Medicare and they won't have to do anything to do that. And if for some reason, you’ve got a Medicare card in the mail and you didn't sign up, then you would contact Social Security to let them know that you're still working and you plan to deny that coverage for now.

John P. Bryson

Okay. So, kind of one more question around the large employer. Once the client eventually does retire, they've extended it, but they do. When and how do they go about registering for Medicare?

Danielle K. Roberts

Yeah. So they're going to enroll in Medicare in a little different process than if they were signing up at 65. There's two pieces that they will need to complete. One is an application for part B, which you can get from the Social Security website. You can complete that and upload it to them. And then the second part is an employer verification.

So you are going to need that employer that you've been working for since you turned 65 to complete a form, testifying that you have had that large employer coverage or you've had employer coverage since turning 65 so that Medicare knows not to assess any late penalties for you. And this is something that a lot of people on the back end are not aware of, that want to go online and try to sign up.

But when you're enrolling past age 65, it's best to do those two separate applications. Have your employer verification completed by that employer, and then upload those to the Social Security office. And we're lucky that we can do that today by the way. You used to have to take that paper down to the local social security office in person. But today, it's a lot easier to do so.

John P. Bryson

Wow. And that's great insight. That's why we had this podcast to kind of avoid the gotcha moments later on. So thanks for sharing that. You mentioned parts of A, B, C, and D I want to dig into D. I hear there's some changes going on to the prescription drug coverage beginning in 2025, which is right around the corner. Can you expand on what changes clients can expect? Both the pluses in the minuses?

Danielle K. Roberts

Sure. So Congress passed some legislation back in 2022 that made some changes going forward to the Medicare Part D program. And so, for many years, Medicare Part D had several different stages, one of which was a coverage gap or called the donut hole where your medications might get more expensive once you were in that window. In 2025, the gap is gone.

So now we have just three stages of Medicare Part D. There is a deductible that you pay upfront which is going to be $590 in 2025. And then after that, you will have your initial coverage level where you're paying a portion and your insurance company is paying a portion. But if you come out of pocket $2,000 on medications during the year 2025, then afterwards you reach the catastrophic coverage level of the plan, at which point the insurance company, in combination with Medicare and drug manufacturers, covers everything beyond that point.

John P. Bryson

Everything beyond that point. Okay.

Danielle K. Roberts

Yeah. And the big thing about this is that it used to be that there was an $8,000, and here in 2024, that cap is at $8,000. So just imagine how that legislation brought that down to 2000, and how beneficial that would be for people taking a lot of expensive medications to have that cap to look forward to.

I think this is a really important point to make. However, one of the negative things you asked about, “is there anything negative?” is that when all these changes were made, we saw the insurance companies come out with bids for Medicare Part D that would have been outrageously expensive. And now that insurance companies have to cover a bigger piece of that pie, these premiums could have gone up quite a bit.

And some of them did. But CMS stepped in with a premium stabilization program which basically gives those insurance company companies a subsidy to help keep that premium lower. So at least for this year and 2025, we have some very reasonably priced drug plans. I do always recommend that when you're looking at a drug plan, it's very important to determine which drug plan out there covers the medications you take at the lowest cost.

So it's not a good idea just to sign up for any part D plan that has a really low premium. We want to make sure that we're choosing one that is going to be the best needs for the specific medications that you take. It's really important to make sure to check the drug formula of any plan that you're getting ready to enroll in because an inexpensive drug plan isn't going to help you if it doesn't cover a medication that has a retail cost of $400.

So, this is something people can, search themselves on Medicare.gov. They can take a look at which drug plans out there, cover the medications they have, or they, of course, can work with agents like us here at Boomer Benefits and we can run those analysis for them. But just one really important point there that we don't want to just go with whichever coverage is cheapest. We want to make sure that coverage has the medications we need at a reasonable price we can afford.

John P. Bryson

Again, another great gotcha to avoid. We're always talking about planning as usually it's financial planning and you mentioned premium. Let's … let's talk about that. Is there a rough estimate, of overall Medicare costs? One can anticipate once they enroll, in Medicare, and at age 65?

Danielle K. Roberts

Well, their cost for Medicare will actually depend on their income. And so this is one of the best areas where financial planners can really help people to plan for those costs. So Medicare Part A, we mentioned, has a zero premium for anyone that has worked ten years in your lifetime here in the U.S. and paid five for taxes, but Medicare Part B and D, they have premiums that you pay while you're enrolled in that insurance.

So, Medicare Part B in 2024 has been $174.70 a month. That's a standard base premium that most people pay and this is going up in 2025 to $185. And that … the you will have most people paying that standard-based premium. Some people may pay less if they are very close to the federal poverty line to where they have Medicare and Medicaid … and this Medicare savings program steps in to help pay for part of those premiums.

But probably more often, folks listening to this podcast are going to be working with people in the other end of the spectrum, which is people that have higher incomes. So when someone is enrolling in Medicare for the first time, the IRS has your tax return on file for all the years that you've worked in the past and Social Security Office will go in and do a two-year look back. They're going to be looking to see what were you earning two years ago, and what did you file on either your income tax return as a single filer or a joint filer.

And if you are in a higher wage bracket, then you will actually pay more for Medicare. And this will be done by a benefit determination letter that they send you in the mail saying, “hey, we took a look at your income from two years ago, and we see that you earned higher than what we consider the basic wage.”

And so they can adjust what's called an income related, a monthly adjustment amount, or IRMAA for short. And this is an additional premium that you pay on top of the standard-base premium based on your income. So, there are several levels within that group and you could find somebody in the highest brackets that might pay $600 … around $600 a month for their Medicare Part B.

So one thing I also like to point out is sometimes when people are turning 65, they've retired. But two years ago, on that tax return that Social Security is looking at, you actually earned more because you were still working. But fortunately, there is a process that you can use to appeal that premium. So you could appeal and say I have retired or I have gone from full time to part time.

Maybe your income changed from … due to marriage, divorce, death of a spouse, or so of an income producing property. So all of those are ways that you can appeal that premium with Social Security and potentially have it lowered immediately, instead of you having to wait those two years for that to catch up with you. And this … this leads me to one really important point, which is decisions that people make with their money when they are 63 and 64 will absolutely affect their Medicare Part premiums, Part B premiums, when they are 65 and 66.

So financial planners can be really important in determining that. There are charts that they will be able to estimate with their client. So, taking a look at that income two years ago or what that person is going to be earning when they're 63. Your financial advisor could forecast the potential IRMAA, based on today's numbers at least, what that person would pay for Medicare Part B, and then also Part D. We have been using a ballpark average of $55 for a part D drug plan in 2024.

You may have a drug plan for you that works that's less expensive or more expensive, but that's a good ballpark number to just … to put on the dotted line when you're just trying to forecast your future expenses. So, a financial advisor would be able to go over with their client what Medicare Part A is for most people, which is zero.

Part B, $185 … could be more if you own IRMAA, and then Medicare Part D will have its own premiums based on whichever drug plan you choose, as well as an IRMAA that's added to Part D. And all of these working parts are just the basic foundation coverage, not even including what someone might spend to, say, add on a Medigap plan.

So you can see, of course, how that planning process with the financial advisor is just so important, so that people don't go into Medicare being unprepared for the costs.

John P. Bryson

That's really helpful. So there's a lot of moving parts. Are there any other considerations that you have a financial professional share with their clients in terms of overall monthly expenditures to … to get ready for?

Danielle K. Roberts

Yeah, for sure. So, one thing is to know is that Medicare does not cover long-term care. So although if you were in an assisted-living facility or in a nursing home, if you need medical care on an inpatient or outpatient basis, of course Medicare is still going to cover that. But it does not cover the rent to live in a facility like that.

So for sure, with their financial planner, they need to be looking at options for either long-term care insurance or, putting enough away money away for a potential long-term care … say that is one really important consideration. And then the second thing is, if someone doesn't have retiree coverage and Medicare is just their basic part A, B coverage, then they're going to either be adding on a Medigap plan or a Medicare Advantage plan to sort of fill in some of the gaps because Medicare does not cover everything just like health insurance under 65.

There are premiums that you pay and then there's deductible co-pays and co-insurance that you pay as you use those benefits. And so, assuming like, on the outpatient basis, Medicare only covers 80%, we want to have some sort of additional coverage in place to pick up that 20% and to pick up the deductibles, co-pays, and co-insurance that affects Medicare Part A as well.

So, when someone is choosing between a Medigap plan and a Medicare Advantage plan, the premiums are quite different. And something they should know if they go the Medigap route, is that those premiums that you start with, you can expect an increase on those, usually of about 13% to 15% per year. So if someone is forecasting what they're going to spend, you want to know about, rate increases that happen with Medigap plans.

And so that's something that you want to look at whether you can afford now and would you be able to afford it, say, 10 years from now, knowing the way that the rates go up.

John P. Bryson

So, I want to dig in is a little bit more the Medicare, the Medigap plan versus the Medicare Advantage plans offer. If a client goes to their financial professional, is not sure whether to get one or the other, what are some of the pros and the cons they need to consider for each of these?

 

Danielle K. Roberts

Yeah, that's a great question and it's a very common question. At Boomer Benefits we have a Facebook group for Medicare beneficiaries. We've got about 95,000 people in it. And in that Facebook group, anyone can come in and ask their Medicare questions. So we have a lot of beneficiaries in there, and that is actually the number one question that we get is what's the difference between a Medigap plan and a Medicare advantage plan.

And you know, how do I make this … this choice? Because people are afraid of making a mistake. You know, they don't want to have some … coverage that doesn't cover them when they need it. So the best way to think about Medigap plans is that you are adding that to your Medicare coverage. So you're still going to get your benefits from original Medicare.

And then you would add on a Medigap plan to help pay for those deductibles, co-pays, and co-insurance and the type of healthcare services that otherwise you would pay. So Medicare gets a bill, Medicare pays its share, sends the remainder not to you, but to that Medigap plan which will pay its share. And then you only get a bill in the mail if there's something left over.

Medigap plans are … have higher premiums upfront, but you have lower and more predictable cost sharing on the back end. And so, this is something that some people really like. And then another really important piece of the Medigap coverage is that the only question you have to ask your doctor is, do you accept original Medicare? And if the doctor says yes, it doesn't even matter which Medigap plan you enroll in, they will all be available to you.

And a lot of people like the idea of having coverage like that, where they can see any doctor in the United States, any provider that accepts Medicare. So you have access to over one million providers. You don't have to choose a primary care doctor. You don't have to get a referral to see a specialist. And so, that freedom of access is really one of the main selling points of the Medigap plan.

But as I mentioned, they have premiums upfront and then rate increases from year to year. So, back in 1997, the Balanced Budget Act was signed into law by Bill Clinton and this created the Medicare Advantage program that we know today, which is simply an option to … maybe you have someone out there that would really like a Medigap plan but they cannot afford one, or they can't qualify for one if they miss their additional open enrollment for one.

And so they created Medicare Advantage plans as an option for those folks to also get coverage but Medicare Advantage pays instead of Medicare. So instead of adding a Medigap plan to original Medicare, when you enroll and run a Medicare Advantage plan, you are actually going to get your Medicare Part A, B, and D benefits through that Medicare Advantage plan.

And this is a Medicare Advantage plan. The simplest way to put it is it's very similar to group health insurance you've had all of your life. An insurance company comes into an area, they contract with a bunch of providers, and those providers provide discounted rates to the members of the plan. So when you enroll in the Medicare Advantage plan, you're going to actually have a network that is going to be based there in your local area.

Maybe it has 10,000 to 15,000 providers as opposed to original Medicare, which would provide over a million providers. But most people are used to this. They're used to having a network close to home from all their working years, and that we see doctors and hospitals in that network to get the best pricing. So Medicare Advantage plans are actually much, much cheaper than Medigap plans because when you enroll in a Medicare Advantage plan, the original Medicare is actually paying that Advantage plan for it to take on all of your health risk.

And so the Medicare Advantage plan will offer the lowest possible premiums, often zero premiums, to attract people to the plan so that they can get paid by Medicare. And these plans, they get over $1,000 a month or more from Medicare. It's going to vary a little bit based on whether they have quality bonuses that they can qualify for.

But if a company can enroll someone in the plan and provide a network for them, have those discounted cost available, and they don't use up, say, more than $12,000 and $15,000 a year in premiums that they're getting paid by Medicare, then they would be making money on a plan like that. And so Medicare Advantage plans have really proliferated because, of course, there's always more healthy people than sick people out there.

Lots of people are interested in joining a Medicare Advantage plan that has a zero premium, and then they just pay for their services as they go. So with a Medicare advantage plan, your agent will go over a summary of benefits with you upfront. And in that summary of benefits, it will list all the different types of healthcare services and what those services will cost you.

So you might have a plan that say, has a $5 co-pay at the primary care doctor, maybe a $25 copay at the specialists. Perhaps if you were to go to get an MRI, you would pay 10% of the cost. So with Medicare Advantage, you're going to pay those healthcare services as you go because you're not getting your care directly from original Medicare anymore.

You're going to get it through that network. And Advantage plans typically have networks that most Americans are going to be really familiar with. So an HMO plan is going to be a little more restrictive. Often you are choosing your primary care doctor. You may have to get a referral to see a specialist. And typically, there is no coverage outside the network except in emergencies.

So these really work best for people that want to be in a plan that's going to be close to home. You're not planning on traveling to get your care. There are also Medicare Advantage PPO networks where you could see a doctor outside the network as long as they were willing to bill the plan, and you are just going to know that you'll pay more for out-of-network coverage, just like you're used to having done all your life, through your health insurance plans.

And of course, there's so much more I could go into with all of the pros and cons and differences, but that's just sort of a 50,000-foot view of the two types of coverage and how they work.

John P. Bryson

Great. You know, Danielle, you're doing a great job of taking a complicated subject to make it easy for us. But there's a lot. A common question we hear is, you know, is there somebody I can sit down with? Is there a Medicare broker? Is it worth the money because it costs money. Can you shed some light on that subject so our financial professionals are best equipped to answer these types of questions.

Danielle K. Roberts

Yes, you are right. It's a very common question. So, when someone is working with a Medicare broker like Boomer Benefits, our service is 100% free to your client. So we will help your client review a whole bunch of different options from, you know, 12, 15, 20 different insurance companies for whatever type of coverage they're interested in and whichever plan they ultimately choose, that carrier or plan will pay a commission to your agent.

And when you enroll this way, the great thing about working with a broker is not just that it doesn't cost the client anything, but then they have someone on the back end for the inevitable hiccups that happen with Medicare. You know, sometimes a bill will get misquoted properly and Medicare will deny all of the claims. And so your client will end up with a bunch of bills and they don't understand why they're getting them or what they should do about them.

They're not sure if they should call the insurance company or Medicare or the provider. You'll also run into things like prior authorizations and drug exceptions and late-penalty appeals. And those are all the things that a broker provides. So when you have a good broker that you have put your business with, that broker is not only going to help you sign up for your coverage initially, but is going to support you on the back end with a strong and quality, customer service line that either that broker or their team, like ours at Boomer Benefits handles, so that you are not on the back end of Medicare.

Not understanding something that happened and not knowing where to go for help, your broker would be your very first call. And of course, in … in cases like our team at Boomer Benefits, we know we have a 75-person team that deals just directly with our existing policyholders to help them through all of those ordinary questions you have on the back end.

So it's a great way to make sure that your clients are going to have really good support as opposed to if they enrolled directly with an insurance company, they don't have a broker. They would handle those things on the back end on their own.

John P. Bryson

We are big believers in expert advice on the Portfolio Intelligence podcast. We think building a partnership with experts that can really help you grow your business is critical. Danielle, I want to thank you for joining us today. Really insightful. Really appreciate your time.

If you want to hear more, please subscribe to the Portfolio Intelligence podcast on iTunes. To read our viewpoints on macro trends, portfolio construction techniques, or business building ideas like you heard today and much, much more.

As always, thanks for listening to the show.

John P. Bryson

Hello, everyone, and welcome to the Portfolio Intelligence Podcast. I'm your host, John Bryson, head of investment consulting and education savings here at John Hancock Investment Management. And today we're going to talk about alternative investments and, specifically, private credit. In September of 2024, Preqin, one of the largest industry providers of alternative asset data tools and insights, published its Future of Alternative 2029 report.

In it, Preqin forecasts the Global Alternatives industry to reach$29.2 trillion in assets under management by 2029. And an exciting and rapidly growing part of that space is private credit. So to help us learn more about the private credit market and the opportunities there, I've invited Alex Catterick to the podcast. Alex is the global head of alternative investment solutions at Manulife Investment Management.

He is responsible for defining the private markets globally for high net-worth strategies and managing and developing and launching those strategies and new products for the high net-worth investor space. Alex has more than two decades of experience in alternative investments, wealth management, and capital markets. Before joining Manulife, he served as the regional head of alternative investments at HSBC, where he led alternative investment distribution, product management, and strategy across the wealth management and private banking platforms in the Americas. Alex, welcome to the podcast.

Alex C. Catterick

Hey John, thanks so much. I'm so happy to be here.

John P. Bryson

You got it. We're really excited to kind of pick your brain and leverage your expertise. So, I kind of want to start with a 101 and talk about private credit in layman's terms. At a high level, how do you describe private credit?

Alex C. Catterick

So I think in … in its simplest terms, what you have is a tailored financing solution that's made directly to a company. And that tailored solution is coming from a private credit firm, as opposed to going through a traditional bank lender, or through public credit markets. So you think about who that might be. These are small and mid-sized private companies, you know, across the United States and, you know, presumably around the world, that is seeking funding, for any, any number of things: growth capital, business expansion, and acquisition, even just funding regular corporate operations.

Sometimes it's for a restructuring or a liquidity event. You know, but these are the uses that private companies, you know, where they need capital for some reason and traditional bank lending sources, you know, are less and less available for these types of loans. And again, typically, if they're private companies, they're not going to go through the public credit markets.

And then if I think of it from the view of the actual, you know, credit provider. You know, they're looking to structure a loan based on their ability to figure out whether the company can repay. So if you think in public credit scenarios, you know, you've got where you've got public markets and you've got, publicly available, financial statements, you've got rating agencies, you've got a lot of regulations around the way that, you know, public credit is structured and these loans that go out. In the private space, it’s negotiated one to one.

So it's much more direct. You know, typically there's a little more complexity to it. And, and that is … maybe the last thing I would say is that it's a huge part of the market. Right? If you think of the number of private companies that exist out there and compare it to the number of publicly-traded companies, you know, it's a … it's a large multiple of private credit firms that need to be able to access this type of capital.

John P. Bryson

Got it. So, companies need a loan. They can go through the public space … through a traditional bank, or they can now go through the private space. And that loan can be used for whatever companies use loans for, right? You know, grow their company … acquisitions, whatever it may be. So it's not as complicated sometimes as we make it, you know, thinking through the alternative space. So let's go further. How do you break down the private credit universe?

Alex C. Catterick

Yeah. So that it's funny when people think of private credit. I think what they're thinking about is traditional direct lending. And, and I think the reason why that's the case is the majority of solutions that have come to the market are traditionally direct lending. And direct lending is, you know, again, this is … this is a non-bank lender.

They're giving a loan to a company that seeks some sort of financing. These are usually senior-secured loans, typically, you know, four-to-seven-year term. You think of the way these loans are structured. They might have high-single to low-double digit yields, you know, attached to them. You know, typically a reference rate like SFOR, plus a spread, I think … I think spreads right now in the private credit space or, you know, maybe around 500 basis points which is, I think, higher than what you might see from traditional, you know, high-yield or leveraged loans.

And, you know, that's kind of bread-and-butter type, you know, just … just regular way business in the direct-lending space. And that's, you know, the vast majority of what the market is. But the private credit universe is expanding, and it's expanding in that there are different flavors of private credit that are out there. What we're seeing, increasingly, is asset-backed financing.

So these are also, you know, typically senior loans, but oftentimes they're going to be secured by a specific asset or a specific asset package or pool of assets. So now you've got, you know, contractual rights to the cash flows. You've got a claim on the underlying asset specifically. So that's different than just, you know, traditional corporate lending.

And then additionally, in the private credit space, you know, you've got subordinated debt, and you know, junior or mezzanine loans, which typically come with a little bit of risk because you're further down in the capital stack, but you do get paid a little more for that. The returns are higher. And then additionally, in private credit, you can see distressed or special-situation lending.

And that's where a lender might, you know, come in to a financially distressed company that might be going through a bankruptcy, and maybe they're looking to recapitalize the balance sheet or looking for catalyst down the road. But this is typically a little more complicated. It might be going through a reorganization or liquidation. And this tends to be, you know, riskier. You might … you might see returns of, you know, 15% or above.

This feels a little more like equity. But again, it does come with that risk. I think you could probably continue to kind of cut up the private credit market, but I think of those as kind of the four main buckets.

John P. Bryson

Gotcha. And if I were to think about an equivalent that our market … places that we’re very comfortable with, it's the public fixed-income space. And the correlations in my head, at least, are … you've got investment-grade bonds or corporate bonds … so private direct lending is similar except it's got a floating rate. Then you've got asset-backed securities in the public market … there, maybe, mortgage-backed securities or other types of asset-backed. Again, with asset-backed private credit, you've got this similarity where there's some collateral that goes along with it. And then you've got the higher yielding in bank-loan space in the public markets. You've got the subordinated debt, distressed debt situation. The other kind of more aggressive spaces is in the private market. So there's equivalence on the public side in the private side. Is that a healthy way or a good way to think about it?

Alex C. Catterick

That's exactly right. That … that's the right way that that folks should be thinking about the private space and comparing it to, you know what?

Folks are more maybe more familiar with, in traditional, you know, public fixed income.

John P. Bryson

Okay. Awesome. So, let's keep going. Why is private credit becoming so popular right now?

Alex C. Catterick

Yeah, I think of this as kind of … with two different lenses, if you will. Part of it is the private credit market itself has experienced a lot of growth over the past, you know, decade, decade and a half. And there's some reasons for that that I'll speak about. And then secondly, is the adoption or the use of it, right? So, as the market itself has grown, you know, investors have increasingly moved into the space. So again, if I look at it from, you know, the growth of the market, a couple of things happened.

You know, we had … we have … we've seen bank retrenchment. So banks have actually pulled back from issuing these types of loans. And part of that is due to regulatory and capital requirements that came into effect after the … the financial crisis in 2008, 2009. And then additionally, what we've seen is, you know, we've had this low interest-rate environment that we had for, you know, all of the 2010s. And that, you know, changed the dynamics for borrowers, right?

You know, companies were willing to chase more debt because they were trying to grow. And we did have a strong economic growth throughout the 2010s. So with the banks pulling back, with the low interest-rate environment, and then you had these private equity companies coming in and recognizing the opportunity, and they started building out these private credit arms to satisfy the demand and the need for this … You know, the ever-growing kind of debt, you know, debt expansion. On the other side of it, you know, the use case has been that with that low interest-rate environment, you know, investors were looking for higher yields. So, you know, through all the 2010s where we had this … this race to zero in terms of, you know, central bank movements on … on interest rates, you know, folks were starved to find yield.

So if I could take a step into the private markets and boost my yield to something … more accustomed to what I would have in my fixed-income portfolios, I was willing to do that. And then finally, I think there's been structural changes to the way that investors can access, you know, this asset class. Historically, this was really reserved for institutional investors.

So large pension funds would work with a private equity manager, they would go into a large, you know … you know, drawdown fund. They would have their money locked up for, you know, five, eight, maybe even 10 years. And that private equity firm would go out and issue these loans. As we've seen in the past, six or seven or eight years, we've seen semi-liquid evergreen solutions come to market.

So it's a structural change into the underlying fund, where the underlying exposure is to this type of lending activity. But the structure, you know, permits investors to have, you know, better access to liquidity over time. So you put all those things together, you know, the growth of the market, you know, the entry of the private equity firms, the low interest-rate environment, investors access.

And it's gotten to the point now, where this is becoming, you know, a very, very popular, you know, if I can call it an asset class. And ultimately, what we're going to end up seeing is that, if you look at the private credit market in 2018, 2010, it was around $300 million. Today, that private credit market is, you know, upwards of $2 trillion today. It’s had significant growth.

John P. Bryson

Wow. That's impressive. So, you mentioned structure a little bit there. And knowing what I do know about the private space, they are different than some of the structures that people are familiar with. Mutual funds and ETFs would be the ones that I think are most popular right now. What are some of the key features you need to think about when investing in these products that might be new to people that are new to private credit?

Alex C. Catterick

Yeah, I think there's a couple things here. So, structure we mentioned, and I'll talk about structure in a second. Understanding the manager, as you would with any investment, right. Whether it's a mutual fund or an ETF, you know, understanding that … that the manager that's behind, you know, that that structure or that fund, is someone you're comfortable with. Additionally, you know, sector or segment focus, right?

Understanding, you know, again, is it direct lending? Is it asset-based lending? You know, is it something that might be, you know, kind of riskier? So, understanding that part. And then really digging into the fact that, you know, I mentioned that the way your structures are set up and I did say I'll come back to that is that they're more liquid, right?

But we all need to remember that the underlying, you know, investments in these funds are illiquid themselves. So as much as the structure can be developed to provide liquidity, there are points in time when liquidity may not be available. So investors need to understand that … that illiquid nature of the investment, and that the reason that they might be able to access higher yields and higher returns is because they're giving up some of their liquidity, and that changes the risk profile.

And then I keep saying and come back and talk about structure one second, but two other things is just asset allocation and position sizing. So, the same way that when you build a fixed-income portfolio and you think about how much investment-grade I want to have and how much high yield I want to have, when we're building out a private credit allocation, you need to think about what's my bite size, you know, how do I want this to relate to the rest of my fixed-income portfolio?

How much liquidity can I bear in my portfolio? So that asset allocation and position sizing is very important. And this is, you know, typically why, you know, folks want to work with advisors to help them think through those … those types of decisions. And then the other thing in these funds is leverage … is that when you're looking at private credit funds, you know, the manager might be using leverage within the fund, and that leverage can help, you know, juice the returns, if you will.

But it also increases the, you know, the downside risk in the event of a default or, you know, if the economy deteriorates. So, you know, being … being mindful of the leverage that's implicit in these vehicles. So, I want to come back and talk about structure, specifically for a second. But John, anything …anything on those points that, that you think I should, also elaborate on?

John P. Bryson

You know, what I think I'd ask is, the way I think about it again is people are familiar with mutual funds and ETFs the same way they're familiar with stocks and bonds in the public space. And then in the private space, like you had mentioned, the traditional true private, you got to expect to lock up your assets from 7 to 10 years. Right. And these are one-to-one contracts, if you will, or you're part of a group of investors. But the evolution is this space in the middle where we're … we're getting more liquidity, making it more available for high net-worth investors.

It's a little bit of the best of both worlds. But along with that is some of the requirements that you need to be aware of … that underlying investments aren't as liquid, so you have to be comfortable with that. The structure which you'll talk about is a little bit different. So there is some kind of working knowledge to understand, but the parts that are familiar is you want to get onboard with a good manager that really knows this space is really well in their specific area. And has had a track record of delivering results. Is that a is that a good summary of what you've covered so far?

Alex C. Catterick

Yeah, that's exactly right. Diligence in getting a manager. You're going to follow the same approach. And, you know, you want to make sure you understand, that they know, you know, how are they sourcing these loans?

How are they working with these, you know, sponsors and structuring them? What are their historic returns? How do you think about loss rates? You know, how do you think about what a manager is going to do in the event of a default? You know, all the questions you would ask if you were looking at any manager. You know that's … that's important.

But on that structure, John, you know, and so I'm sorry to throw some, you know, nomenclature at folks, but the structures that have emerged … So the one that we see is the most popular in the private credit space is a business development company. So a BDC, and a BDC is structured in a way that it allows the manager to go out and actually, you know, source and invest in these loans.

And typically the the way that investors get in these … These funds are typically designed to have monthly, or sometimes quarterly subscription processes. So you're not … It doesn't trade the way that an ETF or a mutual fund or stock or a bond does. You subscribe into the fund. You know, you typically fill out a form, you get admitted into the fund, and now you're an investor in the fund.

A lot of times these funds are designed to have a lockup. So in traditional private credit or private equity where you're locked up for, say, you know, 7, 8, 10, 12 years, the lockup in these semi-liquid evergreens is typically just one year. So you come in, you know, you can't ask for your money back for a year.

If you do want your money back inside a year, typically you're able to get it put at a haircut. So a discount to what you put it in at. And the idea is, you know, that's helpful to the manager to know that they have the ability to deploy that capital on your and the other investors in the fund’s behalf as they build out the portfolio.

After that year is up, typically you can redeem from the fund, but it's typically quarterly. So on a quarterly basis you can get your money back. And that's how a lot of these funds have been designed. In addition to BDCs, you might hear the term, you know, tender-offer funds or interval funds, and in the real estate space with REITs. You know, these are all the structures, but the way I just described … kind of the way you get in and get out, is fairly consistent across … across these funds. The other thing that's really important to note is that the portfolio itself, typically about 80% of the invested capital is going to go into traditional private credit, and then 20% is going to sit in ... I would just call it a liquidity bucket.

It's going to sit in public securities, or it could be ETFs … kind of a kind of a managed credit sleeve. And the reason that … that 20% buffer exists is to satisfy the redemption requests as they come in. So, you know, investors are essentially getting 80% of their portfolio into private credit. The other 20% is more liquid. And that also should factor into the way that folks think about this from an investment and an asset allocation perspective.

John P. Bryson

That is super insightful and helpful as we think about this for our audience as they're getting more comfortable with it. There are some new things, terminology, structures that you need to get familiar with it, but it' s… it's well worth it. So let's pivot to that.

Alex C. Catterick

Hey, John, you know, John, I'm so sorry. One thing I didn't say, and this is maybe the maybe the most important part: The manager can say no. They can … they can gate your redemption request. Typically, the fund is structured so that up to 5% of the value of the fund can come out in any given redemption period. And if their redemption requests exceed that 5% limit, you know, the manager can say, you know, you're going to have to wait for another quarter. And the reason for this is it actually saves the investors in the fund from forcing the manager to exit positions for, you know, an uneconomic reason, right? For selling when they don't want to sell something. So understanding, you know, that that gating or queuing mechanism, on … on the redemption part is … is important part to …to mention as well. I should have said that in the outset.

John P. Bryson

I'm glad you did, because that goes back to your point where people need to understand that these new structures are becoming more liquid with monthly liquidity or quarterly liquidity, but the underlying investments are illiquid. Therefore, the manager needs some discrepancy on saying no. They need to do that to protect the portfolio so that they are doing what's best for all investors, not just one investor that says, I planned on being in this for the long term, but I need to get my money out a little bit earlier. So I'm glad. I'm glad you mentioned that.

So we talk about it. We're clear up front because we want people who go in and invest in these products to go in eyes wide open. We think there's excellent opportunity to diversify your portfolio with alternatives, but you have to go in with eyes wide open. And that's why we cover this up front. But let's also talk about what some of the benefits are of investing in private credit.

Alex C. Catterick

Yeah. So the first thing I always mentioned is, you know, your yields are higher, right? By design, the … the … these private loans come with … premium yields as a result of the illiquid nature of the underlying loans that are being issued. So the benefit to investors is adding, you know, that additional income, that additional yield to their portfolio. And, I’d like to say in some cases, you could argue that there's less risk with the private credit space as long as you're willing to give up that liquidity. If you look over time, loss ratios in the private credit space have actually been lower than what you've seen in traditional, high yield, and in the broadly syndicated loan market.

So from a law standpoint, you know, you tend to have, a little better protection and then recovery rates in the event of loss tend to be higher in the private credit space. So, if you can argue that you're getting better returns with, you know, lower risk, despite the fact that this is less liquid, you know, that's the reason why you want to be able to invest in private credit. And that's the reason why institutional investors have had this as a large allocation for, you know, a number of years.

John P. Bryson

Yeah. There it is right there that trade off. If you're willing to accept some of the illiquidity, you can get some premium in terms of lower risk and higher return. That's what we've seen in the past. Institutional investors recognize that.

Alex C. Catterick

And then the other thing is I would say … diversification is that, I said at the outset that, you know, these loans are going to small- and mid-sized private companies and that the … the private … the number of private companies in the United States dwarfs the number of public companies. So by having exposure to private credit and having exposure to these private companies, you know, you're really participating in a broad part of the economy that maybe isn't in your portfolio right now.

And then, you know, if you're just extrapolate that across, you know, folks, just think of the number of private businesses that are out there that are, you know, I don't know … service providers and, you know, technology companies and manufacturing companies that are up and down the value chain of a lot of the public companies we're all familiar with.

But they're providing really important services. And, you know, being able to actually access this part of the market, I think is important. And again, is underrepresented in, you know, the vast majority of individual investment portfolios today.

John P. Bryson

Yeah, we definitely see that. We see … and I research a lot of institutional investors, up to 50%. In alternative individual investors is much, much smaller … We're pushing for people to think of an allocation between 10% and 30%. I think most are probably under 5%, but more and more are growing that. Hey, let me let me ask a different question, because we've talked about a lot of the benefits for investors in private credit. What's the benefit for the companies to stay in the private space? You mentioned that they might not have access because banks have limited how much they're lending, but what other benefits are there for the companies to stay in the private space?

Alex C. Catterick

In terms of the … in terms of the private equity and private credit firms that are issuing the loans?

John P. Bryson

No, the actual end company that's … that's getting the loan, you know, what’s the benefit there?

Alex C. Catterick

Oh. Yeah. I mean, in a lot of cases, you know, these smaller mid-size private companies can't access the credit markets as directly. Right? So, they need to work with these private lenders in order to have the capital to do some of the things that I mentioned, like, you know, business expansion and so on. But also, in general, a lot of companies, you know, don't want to become public companies.

Right? And you don't necessarily want to have to do quarterly regulatory filings. And, you know, there's a lot of, time and effort and expense that private … that private companies don't want to necessarily go through in order to become public companies. So, it's a great way for them to access capital, it's a great way for them to continue to, you know, grow and expand their business.

Typically, they have, you know, good working relationships with the lender. Often times these lenders can help provide, you know, capital solutions and, you know, maybe give some guidance around the business. They can make introductions to other companies. So, there's a lot of benefit for working with, you know, these … these private equity sponsors. And that's why I think companies are continuing to, to, to go down this path.

John P. Bryson

Got it. That makes a lot of sense. Okay. So let's turn our focus now and talk about are there any areas in the private credit market that are particularly compelling to you right now.

Alex C. Catterick

Yeah. So, traditional direct lending has been the first step out of fixed income for folks that are trying to build out the alternative credit category and that … that traditional direct lending is, again, as I said, a senior secured, it's … you know, loans that are issued to companies that, you know, they're looking for, again, that kind of growth capital.

You know, typically the, you know, the lender is basing it on, you know, the general corporate cash flow of the company. And that's great. It's great that, that … that is a market that exists as a market that it's grown. But we tend to think that, you know, the better part of, I shouldn't say better. We tend to think that investors should start to look beyond traditional direct lending.

And I would say the next step, in terms of that journey … journey would be into asset-based lending. So I've mentioned previously that when we look at the asset-based lending market, you know, that includes things like, you know, loans that are structured against a pool of assets or an individual asset. So you think of, you know, the use case here would be for, you know, airlines could issue a loan and have the engines of an airplane as collateral.

You see this happen in the marine and shipping businesses. Typically, real estate can be used to secure, you know, loans or packages of loans. You can see the same thing with receivables. Or inventories. And this is a little more of a specialty-lending area where you probably are seeing higher returns even beyond what we talked about in the direct-lending space, because not only is there an illiquidity premium, there's a complexity premium because the manager really needs to understand these industries.

They need to understand these assets. And this is a … this is a growing space in the market. And we think that there's a great opportunity for investors to broaden out their private credit exposure, by looking at the asset-based lending space.

John P. Bryson

So, Alex, we've covered a lot of different topics quickly in the alternative space and the private credit space can you summarize for me, high level, talking to an end investor, what are the key things they need to be thinking about when exploring private credit?

Alex C. Catterick

So I would say I would say three things. I would say the first is that, investors should start thinking about private credit as an extension of their fixed-income portfolio, and they should think about it in terms of, if I'm going to have a portfolio, you know, am I ever really going to take it to 100% cash? And I think the answer you're going to find to that is almost always no. So, if you know that you have, a portfolio that's going to remain invested, then you should have the ability to bear some illiquidity. And, you know, that illiquidity, you know, should possibly be allocated to private credit where you're able to get higher yields. And those higher yields can complement the rest of that, you know, fixed-income portfolio.

The second thing I would say is that folks need to be super aware of the structures in the managers that are active in this space. And the reason I say that it comes back to our discussion before that, it's different to what investors maybe they are familiar with. And we should still make sure that we're kind of super focused on the restrictions that come with something that we're saying is a more liquid version of private credit.

And then we also want to be really super aware of who the underlying manager is. And you know why … why we want to work with them and why we trust them. And then finally, I would say that, you know, this is just a growing opportunity set and that, you know, if we look at traditional direct lending, that has been the first step. I almost think of that, you know … you know, if you're trying to build out a portfolio and you want to have beta in your portfolio, if I think of it in the equity market terms, you know, you can own the S&P or you can own the triple Qs. But in the private credit space, as we see this growth, you're going to see different underlying exposures or exposures like I mentioned in the asset-based lending space.

You're going to see funds that emerge that are going to be sector-focused or geography-focused. You're going to see funds that are, you know, less risky or more risky based on, you know, what it is that they're investing in. And I think that this market is going to evolve the same way that, you know, investment markets evolve generally.

Again, you can … you can have data in your portfolio or you can have other flavors that can help you design the types of, you know, risk and return profiles that you're trying to achieve. And as the space grows, I think, you know, investors and advisors need to stay educated, and knowledgeable on the topic. And, you know, that's why, you know, we like to make ourselves available, and speak about these topics.

John P. Bryson

Alex, this is exactly what I was looking for. The point of the Portfolio Intelligence podcast is to help our advisors or financial professionals build better outcomes for their clients and build a better business. And we think the alternative space can do exactly that.

I want to thank you for joining the call today! Folks, it is an exciting landscape. It's a complicated landscape, but I encourage you to reach out to your local business consultant or financial professional to really understand this space. And if you want to hear more, I would love you to subscribe to the Portfolio Intelligence podcast on iTunes or your favorite, podcast location.As always, thanks so much for listening to the show. Have a great day.

John P. Bryson

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