Advisers who don't actively consider health care costs during retirement income planning with clients are missing out on an opportunity to set themselves apart from the pack, and tackle a subject that clients increasingly value.
“I think it can help differentiate from other advisers that aren't doing it,” said Erik Carter, financial planner at Financial Finesse Inc. “[Health cost] is probably one of the biggest concerns people have.”
“If an adviser isn't talking about that, they're missing a lot of the market,” he added.
Diane Woodward, financial planner at Oak Tree Wealth Management, separates health care costs from the rest of a client's expenses in retirement when drawing up a financial plan for most clients, essentially creating two buckets for retirement income analysis.
Ms. Woodward factors an inflation rate of around 3% on retirement expenses other than health care. She assesses a rate of nearly double, around 6%, for health costs due to
the pace of inflation in the U.S. health sector.
According to one study conducted by Fidelity Investments, a couple aged 65 and retiring in 2015 could
expect to pay $245,000 on health care out-of-pocket throughout retirement. That's up from $220,000 last year.
“The most important part is recognizing how much faster those expenses have been going up and planning for that,” Ms. Woodward said.
| Things to consider when talking about health care with clients |
| • Consider the scope of clients' potential out-of-pocket health costs. One study found a couple retiring in 2015 could expect to spend an estimated $245,000 during retirement on health care. |
| • Discuss the health conditions and longevity of parents and grandparents. A simple conversation can provide a glimpse into the potential scope of a client's health costs in retirement. |
| • Use health savings accounts (HSAs) if available through an employer, and contribute to the limit if possible. The 2015 limit is $3,350 for a single plan, and $6,650 for family plans, with a $1,000 catch-up contribution for both. In retirement, consider using other savings to pay health costs first to maximize tax-free growth. |
| • Adjust for an inflation rate on health expenses greater than that of most other retirement expenses. |
| • Consider long-term-care insurance, which isn't covered under private health insurance or Medicare but could save retirees a substantial amount of money. |
According to a Nationwide Retirement Institute survey scheduled to be released on Wednesday, only 10% of affluent pre-retirees — those with at least $150,000 in annual household income — who've discussed retirement with their financial adviser have had a discussion around health costs. However, 57% plan to have that discussion in the future.
“It's a tremendous opportunity for advisers,” said John Carter, president of Nationwide's retirement plans business.
Ms. Woodward said her discussions are individualized based on a client's health and anticipated retirement age. For example, if a client wanted to retire before age 65, a financial plan would have to factor in private health insurance to fill the gap between Medicare enrollment.
In the health care portion of the financial plan, Ms. Woodward factors in Medicare premiums, Medicare supplemental insurance premiums, Part D and Part B premiums, and any co-pays and deductibles, as well as any additional money a client might need — for example, hearing aids, teeth and glasses aren't covered under Medicare for most retirees.
Christopher Van Slyke, partner at WorthPointe Financial, puts clients into two categories when determining his health care approach. For those really behind on saving for retirement, Mr. Van Slyke typically doesn't usually add health care into the financial conversation, in order to prevent further anxiety. One of the tricks to financial planning, he said, is to keep a client's spirits up.
“I don't need to add fuel to the fire,” he said.
However, for those who have a fairly substantial amount of assets, in the ballpark of $2 million, he broaches the subject, and adopts a draw-down strategy that provides enough of a cushion for unknown medical costs.
Similarly, Scot Hanson, financial adviser at EFS Advisors, will recommend a draw-down rate of 3% of assets annually for clients in the first few years of retirement to provide a buffer.
“A lot of times [clients] are spending more than they originally planned because health costs are higher than they anticipated,” Mr. Hanson said.
A health savings account provides a tax-advantaged way to save for health costs ahead of retirement. HSAs are an undervalued vehicle, according to Mr. Carter, because of their triple-tax-advantaged nature — money isn't taxed going in, as assets accumulate, or coming out if used for health costs.
If an HSA is available to a client — they're only offered coupled with high-deductible health plans — Mr. Carter recommends maxing out contributions to an HSA before a 401(k) because the tax benefits are greater.
