Paying for health care was named the No. 1 retirement concern by more than 70% of respondents in a 2017 American Institute of CPAs’ survey.
This will not be a surprise to advisors who have seen health care costs rise on the list of their clients’ concerns, driven by increasing awareness of the impact health care costs on retirement budgets. Paying for health care has become a critical planning issue.
Addressing these expenses requires advisors to develop an understanding of Medicare and supplemental premiums, and the range of additional out-of-pocket expenses clients will need to cover in retirement. Hearing, vision and dental costs are often overlooked in planning.
Other issues that will impact health care expenses also must be built into the planning process. Health status (and its impact on projected longevity), state of residence and Medicare surcharges — which kick in when annual modified adjusted gross income reaches $85,000 for individuals — are important considerations.
Retirees are often surprised that health care costs in retirement are much higher than they expect. Why? Because when they were working, their employer paid around 75% of their premiums. In retirement, they are responsible for 100% of their health care expenses. Premiums for Medicare Part B, Part D and supplemental insurance to provide equivalent coverage to an average HMO will actually be 80% greater than the premiums they paid when they were working. And, driven by health care inflation, total costs in 20 years will be 180% higher than today.
Since health is key to longevity — the most significant variable in the retirement planning process — it is essential to incorporate it into retirement planning. This requires reliable data for planning purposes. Drawing on 530 million medical claims, actuarial longevity and other data, advisors can project average health care costs and expected lifespans for clients based on health status, age, gender, income and state of residence.
Although it may seem like a challenge, health care provides a unique opportunity for advisors to help address a key need. They can do this by discussing investment strategies, increasing assets under management and potentially saving clients tens — if not hundreds — of thousands of dollars in retirement by optimizing portfolios for health care.
Our white paper, “Why Health Needs To Be Part Of Retirement Planning,” provided a consumer perspective. Drawing upon our health care cost data, here is context around five specific reasons for advisors to incorporate health care into the retirement planning process.
Reason No. 1: Driven by health care inflation, costs will be greater at the end of retirement than the beginning — and significantly higher for younger Americans.
In the white paper, we noted that total lifetime health care costs for a healthy 65-year-old couple (average projected life expectancy of 87 for the man, 89 for the woman) retiring this year are projected to be $387,644 in today’s dollars ($572,960 in future dollars). This includes premiums for Medicare Parts B and D, supplemental insurance (Medigap) and dental insurance, as well as out-of-pocket costs related to hospitalization, doctor visits, tests, prescriptions drugs, vision, hearing and dental.
For advisors, helping clients plan for the future cost of health care presents multiple opportunities to add value. Here are two:
First, our experience shows that simply sharing retirement health care cost data with clients drives increased retirement savings. On a large scale, we’ve have seen increases to 401(k) contributions averaging as much as 25% at plan sponsors. Health is a powerful motivator of investment behavior.
Second, since health-related expenses will rise through retirement, advisors need to work with clients on developing investment and decumulation strategies to ensure funds will be available to address this need.
In the first year of retirement, a healthy 65-year-old couple’s total annual premiums and out-of-pocket expenses will be $12,286. Driven by health care inflation, in 20 years at age 85, they will need $34,268 (future value) to cover these costs. This is before long-term care is factored in. For clients in their 40s and 50s, future health care expenses will be significantly higher both at the start and end of retirement.
A key takeaway for advisors is that portfolios will need to generate increasing cash flows through retirement to address health care expenses.
Reason No. 2: Healthier, longer lives will mean higher health care costs in retirement.
Annual health care expenses will be greater for retirees in poor health. But lifetime expenses will generally be higher for healthier retirees because they will, on average, live longer.
A 55-year-old woman with type 2 diabetes (projected to live to age 80) will pay on average $3,470 more per year in medical-related expenses than if she were healthy. However, with a shorter expected lifespan, her lifetime health care expenses will be $158,711 lower than a healthy woman.
Since health status and expected longevity have such a central role, advisors need to help clients understand projected costs for individuals based on their health conditions and lifestyle. While these conversations may not always be comfortable, actuarial projections of longevity based on age and health condition provide a far better starting point for a discussion of savings goals than a one-size-fits-all assumption of living to 95.
With expected actuarial longevity as a starting point, advisors should discuss the impact of a shorter or longer lifespan on these expenses to help clients make informed planning choices.
Reason No. 3: Changing health-related behaviors will impact longevity and healthcare costs.
Half of the adult population in the U.S. suffers from a chronic condition, including high blood pressure, type 2 diabetes, obesity and high cholesterol. As many as half of those who have been prescribed medications do not take them as instructed.
Health care expenses are directly related to how well conditions are managed. A 45-year-old man with high blood pressure, who follows doctors’ orders and makes small health-related changes, would save an actuarial average of more than $3,600 in annual pre-retirement out-of-pocket health care costs. He’ll increase his expected longevity in the process by two years.
By sharing average annual projected cost savings from improved health, the value of those savings (if invested), as well as the additional longevity that can be achieved (which will mean higher lifetime costs), advisors can help clients frame health decisions in terms of retirement planning goals.
If this 45-year-old man manages his health properly and invests his out-of-pocket savings from improved wellness, assuming a 6% return, he would be able to increase the value of his retirement account at age 65 by more than $100,000.
For advisors, putting health-related behavioral changes both in the context of finances and the benefits in terms of more years with grandchildren creates an opportunity for the type of personal and value-added engagement that drives account retention, acquisition and increased assets under management.
Reason No. 4: Health-related investment choices matter.
Investment choices, portfolio mix, savings and decumulation strategies designed around health care have a significant impact on expenses and retirement income.
Advisors can help clients save thousands of dollars, by selecting financial products including Roth 401(k)s/Roth IRAs, certain life insurance and annuities products (including non-qualified annuities), as well as health savings accounts (with their triple tax benefits) for clients in high-deductible plans, to reduce MAGI and minimize Medicare surcharges and taxes in retirement.
With clients questioning asset management fees, discussions that incorporate health provide an opportunity to provide value-added advice to help maximize retirement income. Time and time again, we’ve seen advisors build deeper relationships with clients and gain additional assets as a result of this conversation.
Reason No. 5: One-time investments can help address retirement health care costs.
For some clients, a one-time lump-sum investment to benefit from compounding returns to fund future expenses — such as a nonqualified annuity, life products or mutual funds — may be the optimal solution to address future health care needs. Others may prefer making additional weekly or biweekly contributions to 401(k)s or other investment vehicles.
For a 50-year-old man, assuming a 6% rate of return and retirement at age 65, an investment of $111,816 today would be sufficient to cover retirement health care expenses including Medicare Part D, dental and supplemental insurance, as well as out-of-pocket costs relating to hospitalization, doctor visits, tests, prescriptions drugs, hearing services, hearing aids, vision and dental. To cover health premiums alone, the investment would be $80,850. (This does not include Medicare Part B premiums, which will be deducted from Social Security benefits.)
Making a lump sum investment to take all or part of future health care expenses off the table is an attractive option for clients with the means to do this. Allocating the funds required to cover these costs in a portfolio designed to generate the cash flow needed to address health care through retirement is a powerful way to deliver the peace of mind clients are seeking.
Our experience underscores the importance to ensure clients that their health care needs will be met. As we have seen, providing projected cost data is among the most powerful drivers of investment and savings decisions.
Drawing upon the data and tools needed to help clients plan for, manage, and even reduce these expenses, advisors have the opportunity engage with clients, save them money, grow assets, and engage in product conversations when health is part of the retirement planning conversation.