Living longer is expensive. A 55-year-old woman will have an average of two extra years of life compared with a man of the same age. This means that a 55-year-old woman who retires at age 65 will face an additional $79,000 in future health care costs compared with a man of the same age. And that’s before factoring in long-term care expenses or living beyond a healthy woman’s average actuarial life expectancy of 89.
Because women are an average of 2.3 years younger than their husbands, they will need to count on living about four years longer than their spouse. When combined with housing and all other living expenses, the importance of planning for these extra years of life is all too apparent.
These are just basic end-of-life costs. An average healthy 65-year-old woman is projected to need $235,526 in future dollars ($153,079 in today’s dollars) to pay for a lifetime of premiums for Medicare parts B and D and supplemental insurance. This rises to $306,426 ($199,951 in today’s dollars) for total costs when out-of-pocket, dental and vision expenses are included.
These future expenses, detailed in our report “The Cost of Living Longer: Women & Retirement Health Care,” may appear overwhelming. But like all aspects of retirement planning, the preretirement savings required to cover these costs are manageable, if tackled early enough.
Advisors can help women remove the risk of not having enough funds to meet their retirement health care needs — specifically after their partner has passed away — by making modest increases in savings or ensuring that a portion of household financial assets is allocated for this purpose. Additional savings of as little as $25 a paycheck starting at age 55 will be sufficient to cover basic Medicare premiums in the final four years of life. By allocating $25,500 (growing at 6 percent) at the same age, total health care expenses can be addressed.
Our experience has shown that when advisors discuss future retirement health care needs — one of the leading concerns of preretirees — their clients act. In fact, one leading plan sponsor saw an average 25 percent increase in 401(k) contributions when the cost of health care in retirement was introduced as a savings goal.
Additional research will need to be done in this area, but we believe there are two simple reasons for this extraordinary increase: 1) Clients want to ensure that their health care costs will be covered in retirement, and 2) the additional savings are manageable.
If all that was required to achieve women’s projected retirement health care goals was increasing contributions to 401(k) or health savings accounts, the advisor’s value proposition might be limited.
But when it comes to health care, advisors have a critical role to play — because future costs will be directly correlated to income in retirement and the composition of a retirement portfolio. Health care must be factored into the retirement planning process — not only in terms of setting realistic savings goals, but in building efficient decumulation plans aligned with retirees’ future financial needs.
The importance of these conversations to women’s retirement security cannot be overstated. From an advisor’s perspective, these conversations provide the opportunity to add value across the range of retirement planning solutions. Advisors can provide value by discussing the following with women in their preretirement years:
Savings strategies to meet health care or long-term care needs in retirement.
Protection products including whole life and long-term care insurance to ensure that funds are available to meet financial needs after a spouse has passed away.
Longevity products including deferred annuities or portfolios designed to ensure that funds are allocated and available when needed most.
Social Security strategies.
Portfolio optimization strategies to maximize lifetime income and minimize Medicare surcharges.
One of the areas where an advisor knowledgeable about health care can add real value is in product portfolio optimization to minimize Medicare surcharges. Surcharges can increase Medicare premiums anywhere from 35 percent to more than 200 percent if modified adjusted gross income (MAGI) in retirement is higher than $85,000 for an individual or $170,000 for a couple.
Because the surcharge bands are not inflation-adjusted, over time a growing number of retirees will be impacted as incomes rise with inflation. For women, this can be a significant issue, because the death of a spouse and the resulting change from married to individual status may lead to higher premiums. (Women — and men — who face surcharges following the death of a spouse may well be able to apply for a one-time exemption.)
The selection of products that do not qualify as income under MAGI may significantly reduce their impact. Building certain types of life insurance and nonqualified annuities along with HSAs into retirement plans — which do not qualify as income under MAGI — can reduce future surcharges by tens if not hundreds of thousands of dollars.
An additional savings challenge women face is saving for long-term care. Given their additional expected longevity, women are more likely to play a role as caregiver during their spouse’s last years of life. As a result of a longer life expectancy, women tend to incur higher LTC costs than men do. Given the exceptionally high cost of future LTC services, women face the risk that their spouse’s needs may exhaust household savings unless these costs are planned for. Again, advisors have a critical role to play in helping couples plan for this eventuality with long-term care insurance, life insurance and savings strategies to ensure a woman’s end-of-life needs will be met.
It is important to note here that actuarial averages are a good starting point for planning, but it is important to plan at an individual level. Age, income, health, location and, as we have discussed, gender all have a significant impact on projected future costs.
The starting point for addressing women’s retirement needs is having a conversation and presenting data that reveal both the challenges of achieving and the opportunities to achieve financial and health care security in retirement. These conversations lead clients to take steps to ensure funds are available to meet their and their spouse’s future needs. That’s a win for women and advisors.
Ron Mastrogiovanni is president and CEO of HealthView Services. Ron may be contacted at [email protected]