The implementation of the Affordable Care Act provides a perfect opportunity to discuss with clients how they will pay for health care during retirement.
The cost of health care is justifiably one of the biggest retirement-planning concerns for Americans. The cost of health care continues to grow, and the costs associated with future medical issues are anything but predictable.
The amount of money that a 65-year-old couple will need to set aside to meet their projected out-of-pocket health care expenses through a 25-year retirement is $283,000, according to a study by the Employee Benefit Research Institute.
That translates to $5,660 per person a year.
Just the premiums for Medicare Part B, Part D and Medicare supplement insurance (Medigap) alone account for about $3,600 per year in costs for each retiree, a number that may rise over time.
Depending on the level of Medigap policy selected, deductibles and coinsurance may make up the balance of $5,660. Remember that Medicare pays only a limited amount for long-term care and, depending on the state, coverage for expenses such as dental and eye care, hearing aids and routine foot care will vary.
Add to that list nonprescription medicines and other miscellaneous health care purchases or alternative medical treatments, and the costs continue to add up.
The fact that there is a substantial cost to participate in the full Medicare program and that additional expenses beyond those covered also will affect clients' pocketbooks could be an eye-opener.
Many are unaware that while Social Security can be collected as early as 62, Medicare eligibility doesn't start until they reach 65. Those planning to retire earlier than 65 should have a plan in place to replace employer-provided health insurance.
By retiring before they become Medicare-eligible, clients will enter the insurance market at an age when premiums are generally the most costly. If they aren't able to maintain coverage through a former employer, they will be in the marketplace as a consumer of health insurance — perhaps for the first time, if they have been part of a company plan for much of their lives.
The emergence of health care exchanges under the Affordable Care Act could help those who need to buy individual plans. Although subsidies will be available for those at lower income levels, chances are that subsidies won't be a factor for clients who have sufficient savings to retire early.
Encourage clients who are retiring early to explore the costs of coverage and to look at all health plan options, as there are many available.
Beyond understanding Medicare, other important health care issues need to be addressed.
Here are key conversations to have with pre-retiree clients:
Are you prepared for an emergency? Another EBRI study shows that 28% of retirees are doubtful that they can come up with $2,000 for an unexpected expense. Unfortunately, unexpected expenses in retirement are too often health-related. Having a healthy balance sheet is one way to be prepared for unavoidable out-of-pocket health care expenses.
What is the health history of your family, and are you preparing accordingly? It makes sense to have a frank discussion with clients about issues that are or have afflicted brothers, sisters, parents and grandparents. Family history is a reasonable measure of medical conditions and risks (and associated costs). These conversations may be uncomfortable. But as a financial professional, you owe it to clients to help them develop a plan that will help cover health care costs. Understanding which health issues their clients could potentially face can help advisers estimate these costs more accurately.
What plans do you have to meet long-term-care needs? Clients are coming to recognize that they are likely to live longer. The potential of living in some kind of LTC arrangement at some point in life increases with that realization. It is important to begin talking to clients about long-term care while they are still many years away from retirement.
Preparing for retirement means considering the costs associated with various plans and goals. Covering health care costs should be another financial goal.
And though future medical expenses can be easy to underestimate while considering the many other expenses that come during retirement, it could be the most critical issue that clients face.
Craig Brimhall is vice president of retirement wealth strategies for Ameriprise Financial Inc.