Advisers’ role in retiree health care

What’s the single biggest expense that your clients will face once they’ve retired? Housing? Recreation?

How about health care costs?

Between Medicare premiums and the portion of medical bills Medicare doesn’t pay, health care costs are actually a bigger retirement expense than housing and recreation combined, according to Peter Stahl, founder of Bedrock Business Results, a consulting firm designed to help financial advisers understand their clients’ health care challenges during retirement.

Those expenses are likely to get worse when you consider that the premiums for Medicare Parts B and D are going up more than 7% a year. The latest Fidelity research shows that a couple who retired last year could expect to spend an estimated $245,000 on health care throughout their retirement years.

MINIMIZING INCOME

When you combine the fact that there is an enormous amount of concern — and confusion — among consumers when it comes to health care expenses, it becomes apparent that advisers would do well to add health care to their planning repertoire.

What can advisers do? Plenty. Because Medicare premiums are based on retirement income, advisers should take steps to minimize their retiree clients’ modified adjusted gross income. They can do that by having clients take a portion of their withdrawals from tax-advantaged accounts such as Roth IRAs, health savings accounts, permanent life insurance policies and reverse mortgages. Moving a married couple’s income just one tax bracket lower can save them $65,000 in Medicare premiums over a 20-year retirement, according to Mr. Stahl.

Health care planning is not just something to do for your older clients. Younger clients should also take advantage of tax strategies now that will benefit them in retirement.

For example, clients who have health savings accounts through their employers would do well to contribute the maximum every year, as those accounts are triple tax-advantaged. However, they should be discouraged from using the account now and instead urged to fund medical expenses from current income if they can. That’s because they’ll likely need that money in retirement, when medical costs will be higher and will be eating up more of their budget.

Health care is a good example of how the advice business is constantly evolving. Those who stay up to date with all of the changes affecting their clients will do well, while those who don’t may well be left behind.