Soaring health care costs squeeze retirees

Health care in retirement is rapidly becoming a focal point for financial advisers, but many continue to grapple with a strategy for managing those costs.

Worries about handling expenses related to health care have moved to the fore for many boomer clients, particularly with a presidential election looming that could shape the fate of Medicare and other entitlement programs.

An AARP poll of 1,331 voters over 50 in July found that 53% are concerned about incurring health expenses they cannot afford, making the topic one of the top five worries for that particular group. The participants included 536 baby boomers, 59% of whom said the economic downturn has meant they expect to rely more on Social Security and Medicare than they did in the past.

New studies and health care cost calculators that project how much money retirees will need to cover future health care costs not covered by Medicare also are a sobering reminder that the flip side of added longevity is a greater need for care.

One of the latest studies, this one from Fidelity Investments, found that a 65-year-old couple retiring this year will need $240,000 to foot out-of-pocket costs not covered by Medicare. The firm assumed the husband would live to 82 and the wife to 85.

PLANNING OPPORTUNITY

While scary for retirees, managing health care costs also presents a unique planning opportunity for financial advisers willing to sharpen their expertise on the topic.

“Advisers used to see financial planning as accumulating assets to replace income, but what we’re finding out is that health care expenses are becoming a larger issue to deal with from an expense standpoint,” said Gavin Morrissey, vice president of wealth management at Commonwealth Financial Network.

But planning for health care costs in retirement still confounds many advisers. Not only is the subject matter worlds away from everyday financial planning and investing, determining the best way to reserve cash to cover health care expenses isn’t easy.

A large part of the battle is estimating what those retirement health care costs might be for a given client.

Brian D. Fenstermaker, managing principal at Envision Consulting Group Inc., has been using Nationwide Financial Distributors Inc.’s Personal Health Care Assessment tool to help forecast those expenses.

HealthView Services Inc., a provider of health care cost software, teamed up with Nationwide to offer the free program to advisers. The program comes up with costs and life expectancy information based on a given client’s health conditions, gender and age.

Once Mr. Fenstermaker comes up with an estimate of how much clients need for health care costs, it’s a matter of deciding how to lock away some assets, if the client is sufficiently wealthy, or figuring out how much income the retiree will need to cover those expenses.

“The optimal way is to segregate the assets; it gives clients peace of mind that there’s a pool of assets for health care costs,” he said. The money might be invested a little more conservatively than the rest of the portfolio.

Other advisers view the cost of care as a recurring expense and treat it as a budgetary item.

James Ciprich, a wealth manager with RegentAtlantic Capital LLC, doesn’t use health care calculators. Instead, he considers the cost of maintenance medication and other expenses, then inflates them at a rate of 5% per year. This way, clients get an idea of how much of an expense they can expect throughout their retirement.

Early retirees who don’t have benefits through their former em-ployer face a significant challenge because they won’t qualify for Medicare until 65.

If they had group coverage through their old employer, the Consolidated Omnibus Budget Reconciliation Act allows them to continue it for 18 months. However, there is no employer contribution and they have to pay the full premium.

Alternatives could include seeking individual coverage privately, perhaps using a high-deductible health care plan.

STICKER SHOCK

The cost of insurance can be a big surprise to early retirees who didn’t bother to consider it before deciding to leave their jobs.

“It’s a shock for people who don’t think about it prior to making that decision on early retirement,” Mr. Ciprich said. “Think about the five to 10 years you’ll have to pay for private insurance. Did you build that into the equation? You’ll find that the em-ployer picked up quite a bit of the expense.”

Helping clients make it to Medicare eligibility is only half the battle because the workings of the entitlement program can be mystifying to planners and clients alike.

Knowing when retirees need to sign up for coverage — and the penalties they can incur for signing up late — are big obstacles.

“Advisers need to understand the rules of when to get into Medicare,” said Kathryn Votava, president of Goodcare.com, a consulting firm that specializes in health care costs. “It’s confusing.”

People reaching 65 but who fail to sign up for Medicare Part B — which covers doctors’ fees — face a 10% premium increase for each 12-month period during which they could have participated in the program but chose not to do so.

SPECIAL ENROLLMENT

Workers who have coverage through their or their spouse’s employer, however, can hold off on signing up for Part B without paying penalties for late enrollment. Instead, they can sign up during the first full month after their other coverage ends.

If an individual reaches eligibility age and has no prescription drug coverage, they must apply for Medicare Part D within 63 days. If they don’t, a penalty using a formula based on the number of months the person went uncovered will be added to their premium. And once clients are hit with a penalty, they’re stuck paying the higher premium.

“We can do a lot of things, but if you’re in a penalty, I can’t get you out of it,” Ms. Votava said. “Since the penalty is a percentage, it will hurt higher-income people even more: They’re already paying the highest rate [for Medicare premiums].”

Perhaps a more costly concern for more-affluent clients is that Part B and Part D are means-tested, so that those with more income pay more for coverage. The programs use applicants’ modified adjusted gross income, plus tax-exempt interest income, to determine premiums. Failure to plan ahead for that outlay could lead to some horrible surprises.

“Higher earners will want to be in a different income tier and will have to adjust their portfolios and figure out what the Medicare premiums will be,” Ms. Votava said. “That can be thousands of dollars of difference each year.”

An even greater concern would be if policymakers decided to shore up Medicare’s financing by introducing means testing to Part A, which covers hospital stays.

[email protected] Twitter: @darla_mercado

SPECIAL ENROLLMENT

Workers who have coverage through their or their spouse’s employer, however, can hold off on signing up for Part B without paying penalties for late enrollment. Instead, they can sign up during the first full month after their other coverage ends.

If an individual reaches eligibility age and has no prescription drug coverage, they must apply for Medicare Part D within 63 days. If they don’t, a penalty using a formula based on the number of months the person went uncovered will be added to their premium. And once clients are hit with a penalty, they’re stuck paying the higher premium.

“We can do a lot of things, but if you’re in a penalty, I can’t get you out of it,” Ms. Votava said. “Since the penalty is a percentage, it will hurt higher-income people even more: They’re already paying the highest rate [for Medicare premiums].”

Perhaps a more costly concern for more-affluent clients is that Part B and Part D are means-tested, so that those with more income pay more for coverage. The programs use applicants’ modified adjusted gross income, plus tax-exempt interest income, to determine premiums. Failure to plan ahead for that outlay could lead to some horrible surprises.

“Higher earners will want to be in a different income tier and will have to adjust their portfolios and figure out what the Medicare premiums will be,” Ms. Votava said. “That can be thousands of dollars of difference each year.”

An even greater concern would be if policymakers decided to shore up Medicare’s financing by introducing means testing to Part A, which covers hospital stays.

[email protected] Twitter: @darla_mercado