uess which financial issue is uppermost in your preretiree clients' minds, yet one that they seldom will discuss with you?
The answer — and a huge problem for society as a whole, as well as your clients, in particular — is health care.
A new online survey by Nationwide Financial revealed that nearly half of high-net-worth Americans who are close to retirement are “terrified” of what health care costs may do to their retirement plans. But 38% of those surveyed said that they haven't discussed retirement health care costs with a financial adviser, in part because they are unsure as to whether their adviser is knowledgeable about the issue.
What clients and advisers don't know can hurt them.
The 1,250 survey respondents — all 55 or older, with household assets of $250,000 or more — estimated that Medicare will pay for 68% of their health care costs during retirement. But Medicare covers only about half of health care costs, according to the Employee Benefits Research Institute.
Many people don't have a good grasp of actual health care costs, because they have paid only a small portion of those costs during their working years, thanks to employer-provided health insurance. As a result, retirees often are unprepared for what could be their largest expense.
For example, most respondents to the Nationwide survey estimated that their per-person out-of-pocket medical cost at about $5,600 per year — about half of what a typical retiree pays, according to Fidelity Investment's annual survey of retiree health care costs. During a typical retirement, Fidelity estimates that medical expenses, excluding long-term-care costs, will amount to about $240,000 per couple.
Clients who have discussed retirement health care costs with an adviser have a better handle on actual ex-penses, according to the Nationwide survey, which was conducted online in January.
“Advisers have an opportunity to play a major role in educating and guiding preretirees to achieve their financial goals,” said John Carter, president of Nationwide Financial. “Advisers who take the time to learn about Medicare and retiree health expenses will be well-positioned to grow their business.”
Retiree health care expertise also is a powerful retention tool. More than half of respondents to the survey said that they would be more likely to stick with their adviser if they could discuss how Medicare and overall health care costs affect their retirement plans.
In the past, estimating retiree health costs was little more than an educated guess. Now there are a few tools available to help advisers calculate those costs.
Nationwide's Personal Health Assessment program, for example, uses proprietary health risk analysis and up-to-date actuarial cost data to develop a personalized cost estimate. It is free of charge to advisers who work with Nationwide.
Other advisers can license a similar health assessment tool for $500 a year from HealthView Services Inc. (hvsfinancial.com), the company that developed the tool for Nationwide. The fee includes education and marketing materials, and support.
A less robust version is available free of charge to advisers at the same website.
The health assessment tool starts with a brief questionnaire about the client's medical history and includes lifestyle questions. The resulting report includes a health profile, health risks, estimated life expectancy and hypothetical out-of-pocket health care costs during retirement.
Sandeep Varma, a wealth adviser with ATS Financial Services, has been using the Nationwide tool since it first became available last summer.
“It can help pinpoint whether the client has enough money to cover potential health care expenses, allowing them to proceed with other financial planning goals, such as gifting strategies,” he said.
The health expense report includes estimates for Medicare and Medigap premiums. Most important, it takes clients' income into account, as wealthier retirees now pay higher premiums for Medicare Part B, which covers doctor visits and outpatient services, and Part D, which pays for prescription drugs.
“Advisers have to be aware that affluent retirees — individuals with income in excess of $85,000 and married couples with income of more than $170,000 — are going to be affected by Medicare surcharges that can add thousands of dollars per year to a retiree's medical expenses,” said Dan McGrath, director of health-care- funding strategies at HVS Financial.
Another new tool that advisers can use to help choose the right supplemental Medigap plan or an all-in-one Medicare Advantage plan is Medicare Genie. Input the age, gender, health condition and city of residence of your client, and the tool will direct you to the most appropriate plan, as well as display side-by-side comparisons of premiums from various insurers.
“How can you expect to design a retirement plan when you ignore the single biggest expense?” asked Jay Fettig, president of Battle System (mybattlesystem.com), which created Medicare Genie.
Advisers can license the tool for a monthly fee, and a free version is available to consumers.
A free retirement health expense calculator is available from Fidelity Investments (powertools.fidelity.com /healthcost/personalinfo.do).
Also check out the CPA's Guide to Financing Retirement Healthcare by James Sullivan (aicpa.org). It goes on sale to the public Friday.
Mary Beth Franklin (mbfranklin @investmentnews.com) welcomes your comments and suggestions for column topics.