On Retirement

Mary Beth Franklin: One surefire way to sabotage a retirement plan

Understimate healthcare costs for clients and watch things unravel

Jul 19, 2012 @ 12:44 pm

By Mary Beth Franklin

Kevin McGarry, director of the Nationwide Institute, which provides the latest research and best practices on retirement income to institutions and practioners, says one of the hottest topics in today's marketplace is how to plan for healthcare expenses. Yet the majority of financial advisers shy away from the topic because they don't know how to do it.

Talk about the elephant in the room! Health-related expenses are the second largest component in the budgets of most older Americans after housing-related expenses -- and the costs tend to rise with age, according to a recent report on spending patterns of older Americans by the Employee Benefit Research Institute.

McGarry, who was the guest expert on this month's Retirement Income Industry Association's member webinar, gave an example of how inaccurate healthcare cost estimates can blow up a retirement income plan.

He recalled a recent meeting with an adviser in Atlanta who had created a retirement income plan for a client, using the client's estimate of $2,500 per year in healthcare expenses. The client, who had previously paid for his own health insurance as a small business owner, figured his health care costs would drop dramatically now that he had sold his business and he and his wife qualified for Medicare.

Based on those assumptions, the retirement income plan clocked in with a 96% success rate. The only problem was the healthcare cost estimates were way out of whack. Most retired couples should expect to pay at least $7,500 in premiums for Medicare Part B, Medicare drug coverage and a supplemental Medigap plan, according to Nationwide estimates. Throw in some basic out-of-pocket costs, and that couple should budget for about $9,100 in healthcare expenses—enough to drop the probability of success for that retirement income plan from 96% to 67%.That hurts.

In past columns, I listed several resources that financial advisers can use to estimate their client's potential health care costs. The list includes the free Personal Health Assessment program available from Nationwide's Income Planning Desk (IPLNDESK@nationwide.com or 877-245-0763). Advisers who don't work with Nationwide can access a similar health assessment tool for a fee from HealthView Services, Inc. developer of the Nationwide tool, or license the Medicare Genie software from Battle System.

And Allsup's Medicare Advisor, a customized fee-based service that helps seniors and people with disabilities choose the right Medicare plan for their needs, recently branched out to work with financial advisers.

Although there is a growing list of resources to help advisers put a price tag on the healthcare elephant, how do you incorporate it into your practice, factor costs into a retirement income plan and leverage client assets to cover what could be one of the biggest costs they'll face in retirement? Setting aside $240,000 in a money market account — Fidelity's estimate of a typical retired couple's out-of-pocket medical costs over their lifetime — doesn't seem practical.

I think this is an important issue that deserves further exploration. Looking ahead to the next InvestmentNews Retirement Income Summit in 2013, would you be interested in attending a session on how to estimate health care costs in retirement and help clients make the right Medicare decision? Would you like to learn how tax-efficient income strategies can minimize Medicare premiums?

Please post a comment here or e-mail me directly at mbfranklin@investmentnews.com with your thoughts about this topic or other suggestions for next year's Retirement Income Summit agenda. The world of financial advice continues to evolve and InvestmentNews wants to give you the most up-to-date strategies.

McGarrry noted that in a 2007 Rydex Advisor survey, only 7% of advisers identified themselves as experts in retiree health care costs compared to 67% who gave themselves a gold start for retirement income strategies. "That's why we see healthcare costs as a huge opportunity," said McGarry. "If you develop an expertise in this area, you'll be better off than 93% of the competition."


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