Should advisers
focus on the staggering estimates of total health care expenditures in
retirement, or look at how near-term expenses will play out over the long run?
When it comes to
helping clients save and prepare for health care expenses in retirement,
financial advisers typically embrace one of two strategies: Focus on smaller
near-term costs and hope for the best, or present clients with the overwhelming
total they will likely need during retirement and hope for the best.
Neither approach is
perfect. But experts say addressing retiree health care costs in any form is
better than not talking about the topic at all, which might qualify as a third
strategy.
"A lot of
advisers are fearful of trying to specifically plan for health care
expenses," said Katy Votava, president and founder of GoodCare.com, a
consulting firm specializing in the economics of health care.
"I think
financial advisers are aware of the issue and want to deal with it but coming
up to speed in dealing with it just seems daunting," Ms. Votava said.
Advisers certainly
try to address the issue of retirement and expenses in their work with clients.
"When I run
illustrations for clients, I'll ask them about their experiences of seeing
loved ones going into assisted living facilities and I'll ask if they know what
that costs. Most of them don't," said Hank Mulvihill, senior wealth
adviser at Smith Anglin Financial.
"When you ask
people questions about what they've seen in their own families, the stories are
often horrible," he said. "People expect to be able to travel and do
things in retirement, but not enough people budget for the health care
expenses. It's not pleasant to talk about, but it's necessary."
Dennis Nolte, vice president
of Seacoast Investment Services, had one client who had to hire a health care
advocate to negotiate down to 40 cents on the dollar more than $200,000 worth
of medical bills that resulted from nearly two dozen knee surgeries.
He recalled that at
one point, "they wanted to cut off his leg from a cost-management
perspective, which was pretty cold."
The client
"ended up pulling out about 20% of his retirement portfolio to pay his
medical bills," Mr. Nolte said.
Because the cost of
health care doesn't suddenly emerge as a new expense in retirement, advisers
often include it as part of the larger bucket of a retiree's costs, alongside
items like food, clothing, shelter, travel and recreation.
But unlike most
household expenses, the cost of health care often spikes the moment an individual
retires, and insurance premiums are no long subsidized by an employer.
That bump, which
can quadruple the annual out-of-pocket costs for the average retired couple, to
around $22,000 per year, is only the beginning, according to health care analysts
and actuaries.
'Big Scary Number'
According to Fidelity
Investments' latest retirement health care cost calculations, a
65-year-old couple retiring this year can expect to spend $285,000 on health
care and medical expenses during their retirement. That figure is up $5,000
from just a year ago, underscoring the unfortunate and possibly unstoppable
reality of health care inflation, with health care costs having increased by
about 5% annually for decades.
"It's a big
scary number that a lot of people trying to save for retirement might not be
planning for," said Hope Manion, a senior vice president at Fidelity.
"If you're 65
today you can expect to live another 22 to 25 years, depending on your
gender," she said. "I don't think enough Americans understand that
your health care is not free once you're on Medicare, and Medicare only offers
limited health care coverage."
Fidelity, like a
lot of firms that benefit from retirement-saving strategies, is in the
"big scary number" camp, believing that seeing the total amount
needed can inspire individuals to act by saving more and planning better.
"It's really
an attention thing," Ms. Manion said. "It's along the lines of the
individual retirement planning perspective that focuses on necessities and
things that are fun. But what's not well-known to most Americans is that health
care is a big and expensive necessity."
Then there are
advisers like Carolyn McClanahan, founder and director of financial planning at
Life Planning Partners, who recognizes the high cost of health care but doesn't
believe prices will continue to rise at the current rate.
"The biggest
issue with health care is it's the most unpredictable cost, because we don't
know when we're going to get sick or die or how we'll use the health care
system," she said. "The way we approach the health care question is
we look at how a person utilizes health care now. Some people are healthy and
go to the doctor for everything. They like second opinions. That's a high
health care user. Then there are also less healthy people who might use health
care differently."
Regardless of how
an individual is prone to utilize and spend on health care, Ms. McClanahan
tries to tamp down excess fears about essentially unknown expenses.
"I want to
dispel the notion that health care can continue to inflate like it has
forever," she said. "If you use the past 30-year history of the rate
of health care inflation, based on that growth rate it would consume 50% of GDP
within 25 years. We can't worry clients about something we know will have to
give in the future. That's why I don't try to make clients worry like crazy
about health care expenses."
Sometimes, she
said, the best remedy is to postpone retirement.
'Keep Working'
"Either you
have enough money, or you don't, and if you don't have a plan for how you're
going to pay for health care, you need to not retire," Ms. McClanahan
said. "When we do health care expenses for clients and show them premiums,
if it doesn't look like they're going to have enough to afford health care and
retirement, they should keep working because it's actually healthier. It keeps
you emotionally healthy and socially engaged."
Even when clients
think they have enough money and insurance to cover medical expenses, the
unexpected can throw a major wrench into their plans.
Ms. McClanahan
recalls a client she was working with on a pro bono basis who turned to
expensive alternative medical treatments after she was diagnosed with ovarian
cancer.
"She ended up
going to a Brazilian faith healer," Ms. McClanahan said. "If you have
a serious disease, don't be reactive. Make sure what you're paying is worth it.
Make sure you're paying attention to the dollars that are going out. You want
to make sure you don't decimate the family."
Projections for
health care costs during retirement are usually large, and sometimes larger
depending on the source of the data and how it's being calculated.
HealthView
Services, which provides health care cost data for the financial services
industry, comes up with an even higher price tag than Fidelity, projecting
total health care costs for a healthy 65-year-old couple retiring in 2019 at
$387,644.
That includes
premiums for Medicare Part B outpatient coverage and Part D prescription drug
coverage, and for dental and supplemental Medigap insurance, as well as
out-of-pocket medical expenses.
HealthView's
projections assume an average life expectancy of 87 for men and 89 for women.
"People are
still generally uniformed about the cost, and we know when they find out what
the numbers are, they take action," said Ron Mastrogiovanni, chief
executive at HealthView.
"The fear
factor is really what's motivating people to take action and put together a
savings plan," he added.
At HealthView, one
component of that fear factor involves pointing out to people that being
healthy can end up adding to the overall cost of their health care during
retirement because of the simple fact that healthier people tend to live
longer.
This is where
financial advisers can and should be playing a significant role in helping
clients estimate future health care expenses. That can sometimes mean giving
clients the good and bad news that they don't need to save for 30 years in
retirement because they aren't likely to live that long.
Basic Longevity
Formulas
"I'm concerned
about people who have medical conditions who can't spend more money because
they think they will be living to 95 when that's not the case," Mr.
Mastrogiovanni said.
While nobody can
predict exactly how long someone will live, there are basic formulas that can
be applied that factor in health status, lifestyle and family history to get a
general sense of an individual's longevity, he said.
"Basic life
expectancy analysis can be accomplished with a simple questionnaire, and you
only need to focus on a few conditions like high blood pressure, high
cholesterol, diabetes, gender, weight problems and things like alcohol and
tobacco use," Mr. Mastrogiovanni said. "Advisers don't want to tell
clients they aren't going to live to 100, but clients appreciate that. If they
have a serious medical condition, they know they're not living to 100; it's not
a surprise."
Jean Young, senior
research associate at The Vanguard Group,
doesn't shy away from the "big scary number," but she said that it
should be considered in the context of how and when the money will likely be
needed in retirement.
"The 'big
scary number' tactic puts it in an actionable frame for people, but the problem
with the big scary number is it assumes you need every penny of that before you
retire," she said. "It doesn't consider that you will have some
income in retirement, and you can pay for some of this out of your retirement
income."
Another issue Ms.
Young has with the tactic of scaring savers into action by presenting them with
what could be an overwhelming target is that it rarely considers the
incremental nature of health care costs. Most people are already paying
something for health care prior to retirement and the difference should be the
real focus, she said.
Niv Persaud,
managing director at Transition Planning & Guidance, is not a big fan of
the fear factor.
"When you're
looking at money being able to provide an income for 30 years, it's
overwhelming, and that's why we're breaking it into three main segments
capturing those years," said Ms. Persaud, who recently obtained her
retirement income certified professional designation from The American College.
Under her system,
an individual's retirement is divided into active years, moderately active
years and nonactive years.
"In active
years, you have a lot of time on your hands and you take up hobbies and take
more trips," she said. "During those active years they spend more
money, but as they age the money for entertainment and travel shifts to health
care."
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