Wrangling clients’ health care costs in retirement

Advisers are trying to get their arms around the uncertainty of health care expenses in old age.

Financial advisers have an array of tools at their disposal to construct a client’s portfolio while accumulating assets. They can also create models that defend against the market perils that await that investor when moving into retirement, showing what the situation would look like in case of a market downturn right at that critical stage.

What few have prepared for, however, is the ultimate unknown: How much should clients save to ensure they can cover all their health care costs and safeguard their nest egg in retirement? To what extent should they plan for chronic conditions that may pop up in later years?

“I come across this quite often,” said Christina Boyd, managing director of wealth management at the Boyd Bencini Gibbons & Associates office of Bank of America Merrill Lynch. “Health problems and the cost of health care are now the top concern that retired clients list.”

Ballpark figures of how much health care costs in retirement vary. Fidelity Investments, for instance, estimates a couple retiring this year will need $220,000 in today’s dollars to cover medical expenses.

The Employee Benefit Research Institute, meanwhile, says that the amount retirees will spend depends on where their drug costs stand. A married couple who had drug expenses at the 90th percentile and wanted a 90% chance of having enough saved for health care costs in retirement by age 65 needed to have $326,000 in 2014.

Bear in mind that higher-income clients generally are expected to pay more out-of-pocket costs related to Medicare. Married couples who file jointly are subject to higher premiums for Medicare Parts B and D if they have a modified adjusted gross income over $170,000, while those with a filing status that’s anything other than “married filing jointly” will pay higher premiums if they have an MAGI of more than $85,000.

Further, long-term-care costs in the event a client suffers from dementia or any other debilitating condition pose an even greater financial threat. Dementia and Alzheimer’s disease won the distinction of being the “scariest disabling condition of later life,” according to a Merrill Lynch survey of 3,303 respondents.

“Having the discussion about long-term-care insurance is really important for people who are close to retirement,” said Lisa Brown, a partner at Brightworth. Health care costs she accounts for include the expense of an individual medical policy for retirees who leave the workplace before Medicare eligibility at 65, as well as Medicare costs, supplemental policies and long-term-care insurance premiums.

MINING STATISTICS

Advisers have turned to different services to estimate health care expenses in retirement. Some practitioners mine statistics to come up with their own estimates, while others use planning programs. Firms that produce such software include HealthView Services Inc., which recently released a Medicare surcharge calculator for advisers.

The best way to go about making such estimates depends on the practitioner.

“We can get our arms around what [out-of-pocket estimates for Medicare supplemental insurance] might be in today’s dollars,” said Cynthia Hutchins, director of gerontology for Merrill Lynch.

“From that standpoint, you can develop a peace-of-mind proposal that would include the costs for deductibles, co-pays and monthly premiums for Part B and Part D,” she added. Ms. Hutchins noted that advisers are using guaranteed income products to help fund such costs.

MINDSET

Physician and financial adviser Carolyn McClanahan, founder of Life Planning Partners, asks clients about their health care mindset when she broaches the subject of costs in retirement. Those who run to the doctor at any suggestion of something being amiss are likely to be high users of health care services, and they will require higher estimates for health care expenses.

“If you have someone who lives a healthy lifestyle, and they have longevity in their family, make it a serious conversation,” Dr. McClanahan said. “How will you plan for your long-term-care costs?”

Another priority is for clients to come up with an advance directive, so they can decide early on how they would prefer to receive end-of-life care.

Meanwhile, Ms. Boyd runs health care cost estimates for future Medicare beneficiaries between ages 50 and 65. She also asks clients whether they’d prefer to have some long-term-care insurance or set aside some savings to self-insure.

One client, a widow, doesn’t want her son to worry about having to care for her in her later years, so she laid the groundwork by funding a long-term-care insurance policy and providing a written plan for him to follow, dictating how she would like to be cared for in case she can’t make her own decisions.

As for annual out-of-pocket health care costs, Ms. Boyd estimates the average for someone age 70 and in moderately good health will be $5,800 — a significant number when you’re talking about a couple.

“A good rule of thumb is to factor in about a 9% annual health care cost increase prior to age 65,” she said. “Those costs rise about 7% from 65 onward. You can see where it’s rising dramatically faster than inflation.”