Solvency of Social Security, Medicare worries advisers

Many see need to address future loss of safety net with clients now

May 24, 2009 @ 12:01 am

By Mark Bruno

Just when market conditions appear to be stabilizing, financial advisers now have something else to keep them awake at night: Both Social Security and Medicare are on a pace to disappear even sooner than expected.

The economic crisis has put both systems — the primary health care and income sources for millions of retirees — on life support, according to reports issued by the government this month. And advisers now find themselves confronted by concerned clients asking whether either program will exist when they retire.

“You now have to plan for the absolute worst-case scenario,” said Erin Botsford, president and chief executive of The Botsford Group of Frisco, Texas, which has $700 million in assets under management.

“You can't count on Big Brother to pick up the tab for retirement — you have to self-fund.”

Treasury Secretary Timothy Geithner announced that Medicare will run out of money in 2017, and Social Security will do the same in 2037, both sooner than previously projected.

“And [Medicare] is the one that's causing advisers to lose the most sleep,” said Dennis Gallant, principal and founder of Gallant Distribution Consulting, a Sherborn, Mass.-based strategic consultant to advisers. “It's really not that far off at all, so advisers need to find a way to address this issue with clients almost immediately.”


For clients under 50, a number of advisers, such as Ms. Botsford, are no longer even considering Medi-care, or Social Security for that matter, in their retirement-planning process.

Many advisers are encouraging these clients to be more conservative with their spending during their remaining working years and establish larger cash reserves to cover medical-related variables during retirement.

Some advisers, such as Brian Nikulski, president of Nikulski Financial Inc., a retirement specialist in Davenport, Iowa, consider it to be a “just-in-case” reserve. And he said that he has been building these larger “liquidity reserves” for clients in ultraconservative investment vehicles: money market accounts, certificates of deposit or in Ginnie Mae funds if clients are looking for some additional yield.

“If there winds up being some form of Medicare or if [a client's] health care expenses are less than we anticipate, then you can consider it to be a bonus,” Mr. Nikulski said.

Most advisers interviewed said that they don't think Medicare will ever completely disappear.

“It would be political suicide for any elected official to allow the health care system for retirees to fail,” said Jeffrey Gitterman, founder and chief executive of Gitterman & Associates LLC, a financial planning firm in Woodbridge, N.J. “It will probably just assume some other form.”

But that is still far too much un-certainty for many advisers, particularly when it comes to one of a client's largest expenses during retirement. For example, for a married couple retiring this year, the average total medical costs during retirement — above and beyond Medicare — amount to $240,000, according to Boston-based Fidelity Investments.

Some advisers are also urging clients to take advantage of health savings accounts — which essentially function like a 401(k), but specifically for health care and medical costs during retirement.

“There's very little downside to using one of these accounts,” said Drew Tignanelli, president of The Financial Consulate in Hunt Valley, Md., which manages $175 million.

“It's 100% tax-free if you withdraw the money for medical costs,” he said. “And if you don't need all of it for your health care expenses, then it's basically an ordinary retirement account.”

And in the case of the latter, it could also help to supplement — or offset the absence of — Social Security if that system eventually be-comes insolvent.

Although Mr. Tignanelli added that shoring up the Medicare and health care systems should be the federal government's “A-No.-1” priority, he and other advisers noted that the issues engulfing the Social Security system also need to be ad-dressed in the rather immediate future.

Generally, advisers noted, Social Security payments account for roughly 20% of an individual's in-come during retirement.

So while the eventual fate of Social Security may have the appearance of a long-term issue, clients need to start planning and saving now if there's a chance they could lose such a substantial — and lifelong — piece of their retirement income.

“We've maintained for several years now that clients need to stop counting on Social Security,” said Paul Knoblich, retirement-planning specialist with Mountain View, Calif.-based Foothill Securities Inc.

Advisers said that the threats to Social Security have made it somewhat easier to talk about annuities and other guaranteed-income products with clients.

“Pensions don't exist for many people, and people see the writing on the wall with Social Security,” Mr. Gitterman said. “They want some comfort, and you need to find other ways to generate guarantees that will last throughout your clients' entire retirement.”

Other advisers are making a simpler recommendation to clients.

“Work longer,” said Everette Orr, founding principal of Orr Financial Planning LLC in McLean, Va.

Mr. Orr, who has about six clients over 70 who are still working, said that many of these clients continue their careers not just for the income but for the health insurance coverage.

“We don't know what will be-come of Social Security or Medi-care, but a lot of people have little interest in waiting for peace of mind,” he said. “So they're choosing to focus on whatever is within their control.”

E-mail Mark Bruno at


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