Closing the Retirement Health Care Planning Gap
Although industry surveys show that paying for health care is among the leading concerns of those preparing for retirement, health care costs are not consistently integrated into retirement plans. There are many prevailing reasons for this, including the beliefs that retirees don’t have the financial capacity to save more; that Medicare will cover most or all health care costs in retirement; that affording quality health care hasn’t been a significant issue for past retirees; that low health care inflation levels will continue to moderate costs; and that there isn’t a way to accurately calculate future health care expenses.
Beliefs aside, the costs remain the same. HealthView Services’ 2015 Retirement Health Care Cost Data Report provides a unique perspective on the magnitude of future retirement health care costs. Using the company’s actuarial and physician reviewed cost projections, which draws on 50 million actual cases and a range of additional data, the company shows that an average couple retiring this year at age 65 will require $402,034 (in future dollars) to cover Medicare Parts B and D and supplemental insurance. When expected vision, hearing, dental, and co-pays are added, their total lifetime health care costs will be $593,869, or approximately 70% of their expected Social Security benefits.
For individuals whose Modified Adjusted Gross Income (MAGI) in retirement exceeds $85,000, or couples who earn more than $170,000, Medicare surcharges will raise costs anywhere from 35% to over 200%. While wealthy families may have the resources to afford these increases, total health care costs for all Americans will be significantly higher than most anticipate. Given these costs, we need to re-frame the question “Can Americans afford to save for health care?” to “Can clients and advisors afford to not build health care costs into retirement plans?”
While many expect Medicare to address the bulk of health related expenses in retirement, the program only covers approximately 50 percent of total health care costs. With health care cost inflation expected to return to more normalized levels of around six percent, lower Social Security COLAs, more health care cost sharing in retirement, fewer retirees with pensions and health care benefits, and longer life expectancy, future retirees will see a much greater portion of their budgets consumed by health care than previous generations have experienced.
Fortunately, tools are available to help advisors and consumers estimate expected health care costs and build them into retirement plans. HealthView Prime, developed by HealthView Services in partnership with the Insured Retirement Institute (IRI), provides advisors with the means to calculate future health care costs on an individualized basis. HealthView is also launching new consumer-friendly calculators during National Retirement Planning Week to help individuals project their future health care expenses and then use the information to initiate discussions with advisors to address these costs.
Once expenses are calculated, advisors can work with clients to prepare for, manage and (in some cases) reduce these costs. There are a number of key steps that should be part of a modified planning process that addresses health care:
- Develop a savings plan based on the portion of future health care costs that clients wish to save for.
- Allocate a portion of retirement income (such as Social Security) to cover the remaining balance.
- Review the benefits of Health Savings Account (HSAs), non-qualified annuities, and life insurance as potential pre-retirement savings products.
- Determine if retirement income will exceed MAGI thresholds and trigger means testing surcharges. And, if so, optimize a retirement portfolio to reduce MAGI.
- Help clients understand impact of pre-retirement choices on their future finances, including when to sign up for Medicare; what supplemental insurance options are available; understanding the impact of location on supplemental insurance costs; and how to plan for and protect assets related to long-term care.
- Prepare a decumulation plan that builds in health care costs, expected longevity, MAGI, and long-term care planning.
Americans who fail to plan early for health care expenses are likely to find themselves burdened by costs that will strain fixed household budgets or possibly even exhaust savings much earlier than anticipated.
Retirement health care planning is both a challenge and an opportunity, for it can create a new path for advisors to optimize portfolios, reassess allocation strategies, and deliver product solutions to meet client needs. By using tools to measure the financial impact of health care, advisors will be well positioned to provide solutions that can improve their clients’ financial security in retirement.
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