Grappling with retirement health costs

It is fairly well-known that Americans are living longer and that medical costs are climbing. How advisers are dealing with these two trends is less clear. There is a good reason why, in the opening paragraph of his cover story last week, InvestmentNews reporter Greg Iacurci referred to health-care costs as “the great unknown of retirement.”
For one thing, just estimating what those costs will be is difficult. Even expert sources can’t agree what an average 65-year-old couple will need as they enter retirement to cover their health-care expenses: $260,000? $158,000? $392,000? $288,400? $377,412?
While much of the discrepancy is due to how different experts calculate costs and what they include in their estimates — long-term care, drug expenses, out-of-pocket extras — suffice it to say that establishing a reliable figure is not easy.

NOT ONE-SIZE-FITS-ALL

Part of the process is realizing that estimating health-care costs is not a one-size-fits-all exercise. As more than one adviser in the story noted, it is important to treat each client individually. Not every client is in good health and not all can be expected to reach their life expectancy. Genes have a lot to do with it, but so does lifestyle. Does the client couple smoke or drink excessively? Are they overweight? Do they exercise? What diseases do they have, and will those diseases impact either the quality of their life or their likely longevity?

(Related read: The Longevity Paradox)

Some of these questions may seem intrusive, but advisers must become medical detectives and find out as much information as they can to make an educated estimate on how long their clients are likely to live and how much money they will need to meet their medical expenses beyond what Medicare and Medigap insurance will pay for.

INDICATORS

A 65-year-old whose parents lived into their 90s may have to plan to put away enough health-care funds for the next 30 years or more. On the other hand, “an overweight, insulin-dependent diabetic in his 60s is not likely to live close to his life expectancy, and likely won’t rack up decades of health-care bills,” observed one adviser who specializes in financial planning for ill and disabled clients.
One adviser carries the process even further, delving into how her clients access health care. Do they see their doctor for every sneeze and sniffle, or do they go to their physician only when it’s absolutely necessary? She uses such information, combined with longevity estimates, to create a profile that helps her estimate costs, including a projection of how many years of long-term expenses to incorporate into her health plans.

PLANNING FOR LTC

Long-term care can be especially troublesome to plan for. The average stay in a nursing home is between two and three years, according to the American Association for Long-Term Care Insurance. That could cost hundreds of thousands of dollars, and long-term-care insurance premiums rose 45% between 2010 and 2015. The kicker is that a client could die without ever needing — or qualifying for — that benefit.

(Related read: Small Social Security cost-of-living adjustment likely for 2017)

All of this may seem a bit overwhelming. But if financial advisers are truly going to be holistic planners in the future and not just investment managers, this is an example of where they are going to have to shine. Like other areas where advisers will have to develop more expertise — Social Security and college funding come to mind — health care can be seen as both a challenge and an opportunity. Advisers who educate themselves and begin to develop ways of dealing with these issues will have a more satisfied clientele and a leg up on the competition.