When it comes to helping clients save and prepare for health care expenses in retirement, financial advisers typically embrace one of two strategies: Focus on smaller near-term costs and hope for the best, or present clients with the overwhelming total they will likely need during retirement and hope for the best.
Neither approach is perfect. But experts say addressing retiree health care costs in any form is better than not talking about the topic at all, which might qualify as a third strategy.
“A lot of advisers are fearful of trying to specifically plan for health care expenses,” said Katy Votava, president and founder of GoodCare.com, a consulting firm specializing in the economics of health care.
“I think financial advisers are aware of the issue and want to deal with it but coming up to speed in dealing with it just seems daunting,” Ms. Votava said.
Advisers certainly try to address the issue of retirement and expenses in their work with clients.
“When I run illustrations for clients, I’ll ask them about their experiences of seeing loved ones going into assisted living facilities and I’ll ask if they know what that costs. Most of them don’t,” said Hank Mulvihill, senior wealth adviser at Smith Anglin Financial.
“When you ask people questions about what they’ve seen in their own families, the stories are often horrible,” he said. “People expect to be able to travel and do things in retirement, but not enough people budget for the health care expenses. It’s not pleasant to talk about, but it’s necessary.”
Dennis Nolte, vice president of Seacoast Investment Services, had one client who had to hire a health care advocate to negotiate down to 40 cents on the dollar more than $200,000 worth of medical bills that resulted from nearly two dozen knee surgeries.
He recalled that at one point, “they wanted to cut off his leg from a cost-management perspective, which was pretty cold.”
The client “ended up pulling out about 20% of his retirement portfolio to pay his medical bills,” Mr. Nolte said.
Because the cost of health care doesn’t suddenly emerge as a new expense in retirement, advisers often include it as part of the larger bucket of a retiree’s costs, alongside items like food, clothing, shelter, travel and recreation.
But unlike most household expenses, the cost of health care often spikes the moment an individual retires, and insurance premiums are no long subsidized by an employer.
That bump, which can quadruple the annual out-of-pocket costs for the average retired couple, to around $22,000 per year, is only the beginning, according to health care analysts and actuaries.
‘Big Scary Number’
According to Fidelity Investments’ latest retirement health care cost calculations, a 65-year-old couple retiring this year can expect to spend $285,000 on health care and medical expenses during their retirement. That figure is up $5,000 from just a year ago, underscoring the unfortunate and possibly unstoppable reality of health care inflation, with health care costs having increased by about 5% annually for decades.
“It’s a big scary number that a lot of people trying to save for retirement might not be planning for,” said Hope Manion, a senior vice president at Fidelity.
“If you’re 65 today you can expect to live another 22 to 25 years, depending on your gender,” she said. “I don’t think enough Americans understand that your health care is not free once you’re on Medicare, and Medicare only offers limited health care coverage.”
Fidelity, like a lot of firms that benefit from retirement-saving strategies, is in the “big scary number” camp, believing that seeing the total amount needed can inspire individuals to act by saving more and planning better.
“It’s really an attention thing,” Ms. Manion said. “It’s along the lines of the individual retirement planning perspective that focuses on necessities and things that are fun. But what’s not well-known to most Americans is that health care is a big and expensive necessity.”
Then there are advisers like Carolyn McClanahan, founder and director of financial planning at Life Planning Partners, who recognizes the high cost of health care but doesn’t believe prices will continue to rise at the current rate.
“The biggest issue with health care is it’s the most unpredictable cost, because we don’t know when we’re going to get sick or die or how we’ll use the health care system,” she said. “The way we approach the health care question is we look at how a person utilizes health care now. Some people are healthy and go to the doctor for everything. They like second opinions. That’s a high health care user. Then there are also less healthy people who might use health care differently.”
Regardless of how an individual is prone to utilize and spend on health care, Ms. McClanahan tries to tamp down excess fears about essentially unknown expenses.
“I want to dispel the notion that health care can continue to inflate like it has forever,” she said. “If you use the past 30-year history of the rate of health care inflation, based on that growth rate it would consume 50% of GDP within 25 years. We can’t worry clients about something we know will have to give in the future. That’s why I don’t try to make clients worry like crazy about health care expenses.”
Sometimes, she said, the best remedy is to postpone retirement.
“Either you have enough money, or you don’t, and if you don’t have a plan for how you’re going to pay for health care, you need to not retire,” Ms. McClanahan said. “When we do health care expenses for clients and show them premiums, if it doesn’t look like they’re going to have enough to afford health care and retirement, they should keep working because it’s actually healthier. It keeps you emotionally healthy and socially engaged.”
Even when clients think they have enough money and insurance to cover medical expenses, the unexpected can throw a major wrench into their plans.
Ms. McClanahan recalls a client she was working with on a pro bono basis who turned to expensive alternative medical treatments after she was diagnosed with ovarian cancer.
“She ended up going to a Brazilian faith healer,” Ms. McClanahan said. “If you have a serious disease, don’t be reactive. Make sure what you’re paying is worth it. Make sure you’re paying attention to the dollars that are going out. You want to make sure you don’t decimate the family.”
Projections for health care costs during retirement are usually large, and sometimes larger depending on the source of the data and how it’s being calculated.
HealthView Services, which provides health care cost data for the financial services industry, comes up with an even higher price tag than Fidelity, projecting total health care costs for a healthy 65-year-old couple retiring in 2019 at $387,644.
That includes premiums for Medicare Part B outpatient coverage and Part D prescription drug coverage, and for dental and supplemental Medigap insurance, as well as out-of-pocket medical expenses.
HealthView’s projections assume an average life expectancy of 87 for men and 89 for women.
“People are still generally uniformed about the cost, and we know when they find out what the numbers are, they take action,” said Ron Mastrogiovanni, chief executive at HealthView.
“The fear factor is really what’s motivating people to take action and put together a savings plan,” he added.
At HealthView, one component of that fear factor involves pointing out to people that being healthy can end up adding to the overall cost of their health care during retirement because of the simple fact that healthier people tend to live longer.
This is where financial advisers can and should be playing a significant role in helping clients estimate future health care expenses. That can sometimes mean giving clients the good and bad news that they don’t need to save for 30 years in retirement because they aren’t likely to live that long.
Basic Longevity Formulas
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“I’m concerned about people who have medical conditions who can’t spend more money because they think they will be living to 95 when that’s not the case,” Mr. Mastrogiovanni said.
While nobody can predict exactly how long someone will live, there are basic formulas that can be applied that factor in health status, lifestyle and family history to get a general sense of an individual’s longevity, he said.
“Basic life expectancy analysis can be accomplished with a simple questionnaire, and you only need to focus on a few conditions like high blood pressure, high cholesterol, diabetes, gender, weight problems and things like alcohol and tobacco use,” Mr. Mastrogiovanni said. “Advisers don’t want to tell clients they aren’t going to live to 100, but clients appreciate that. If they have a serious medical condition, they know they’re not living to 100; it’s not a surprise.”
Jean Young, senior research associate at The Vanguard Group, doesn’t shy away from the “big scary number,” but she said that it should be considered in the context of how and when the money will likely be needed in retirement.
“The ‘big scary number’ tactic puts it in an actionable frame for people, but the problem with the big scary number is it assumes you need every penny of that before you retire,” she said. “It doesn’t consider that you will have some income in retirement, and you can pay for some of this out of your retirement income.”
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Another issue Ms. Young has with the tactic of scaring savers into action by presenting them with what could be an overwhelming target is that it rarely considers the incremental nature of health care costs. Most people are already paying something for health care prior to retirement and the difference should be the real focus, she said.
Niv Persaud, managing director at Transition Planning & Guidance, is not a big fan of the fear factor.
“When you’re looking at money being able to provide an income for 30 years, it’s overwhelming, and that’s why we’re breaking it into three main segments capturing those years,” said Ms. Persaud, who recently obtained her retirement income certified professional designation from The American College.
Under her system, an individual’s retirement is divided into active years, moderately active years and nonactive years.
“In active years, you have a lot of time on your hands and you take up hobbies and take more trips,” she said. “During those active years they spend more money, but as they age the money for entertainment and travel shifts to health care.”
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