Who is more worried about the impact of escalating health care costs on retirement income planning, you or your clients?
Nearly half of the high-net-worth Americans who are close to retirement are “terrified” of what health care costs may do to their retirement plans, according to a 2012 Nationwide Financial Services Inc. survey of 1,250 respondents 55 and older. But 38% of those surveyed said they have not discussed health care costs with a financial adviser, in part because they are unsure if the adviser is knowledgeable about the issue.
“With the continued focus shifting from accumulation to distribution strategies, advisers are increasingly realizing that effective income planning requires a comprehensive understanding of health care and custodial-care financing,” said Peter Stahl, principal of Bedrock Business Results LLC, which provides training to financial advisers on Medicare, long-term-care and income planning for health care needs in retirement.
“Clients will gravitate to and consolidate assets with advisers who provide guidance on health care funding and custodial-care needs,” Mr. Stahl predicted.
Until recently, advisers have had few benchmarks to plug into their retirement income software beyond annual health care inflation, which has outpaced general inflation, and estimates of average lifetime out-of-pocket health care expenses for a typical retired couple — currently $240,000, not including long-term-care costs.
Now they can get personal.
HealthView Services offers an evolving tool that can help financial advisers develop more-precise client health care profiles based on the answers to 10 key health and lifestyle questions (see
sidebar). The results project life expectancy and health care costs based on actual health insurance claims data and Medicare means-testing rules for higher-income beneficiaries.
“While financial advisers don't need to become experts in all of these areas, they do need to know the right questions to ask and where to seek answers,” said Tom McKenna, national sales director of HealthView Services. “We took this complicated subject matter and coded it into software, enabling an adviser to answer a couple of questions and to convey the results to their clients.”
A CASE STUDY
HealthView's HealthWealthLink tool can project future health care expenses, recommend ways to reduce costs and suggest how to position assets to pay for them. For example, assume that John and Mary Smith, 63 and 60, respectively, plan to retire to Sarasota, Fla., in seven years when John is 70 and Mary is 67. Their current household income is $180,000. John has high cholesterol and Mary has high blood pressure.
Because their income tops the $170,000 threshold that triggers a Medicare surcharge for married couples, the Smiths will pay more for their Medicare Part B and Part D monthly premiums than most retirees. Their medical conditions mean that they will need to buy more-comprehensive prescription drug and Medigap coverage than a healthy couple. And their plan to retire to Florida, which has higher health care costs than some other states, means their monthly health care premiums will be even higher.
All told, their lifetime out-of-pocket health care costs in retirement are projected to top $670,000 — nearly triple the cost of a typical couple retiring today, thanks to ever-increasing health care costs in the ensuing seven years and their unique health profile and retirement destination.
But the HealthWealthLink tool shows how the couple could cut their projected retirement health care costs in half by retiring to a state with lower health care costs, such as Arizona; purchasing all-inclusive Medicare Advantage coverage rather than enrolling in traditional Medicare and buying supplemental Medigap and prescription drug plans; and repositioning their assets to hold their modified adjusted gross income below the $170,000 threshold that triggers a Medicare surcharge for married couples.
The tool, which has a built-in calculator for Social Security-claiming strategies, quantifies existing income sources and identifies other potential assets, such as proceeds from the sale of the couple's house, to finance retirement expenses. It also recommends establishing Roth IRAs to create future tax-free income in retirement in an effort to avoid Medicare high-income surcharges.
The HealthView tool uses the same software that powers Nationwide's Personal Health Care Assessment tool and Putnam Investments' Health Cost Estimator for 401(k) plan participants but is more flexible, allowing individual advisers to play with “what if?” scenarios and create customized reports. It costs $500 per year.
GETTING GOOD ADVICE
Projecting future health care costs is just part of the retirement spending puzzle. The first step is making sure clients make the right choice when they become eligible for Medicare at 65, said Mary Dale Walters, senior vice president of Allsup Medicare Advisor, a fee-based Medicare plan selection service.
Research shows that few Medicare beneficiaries ever switch plans after their initial choice, even if it would save them money, and most retirees pay too much for the Medicare D prescription drug plan. “The biggest risk factor is paying too much for coverage when they first come into Medicare,” Ms. Walters warned.
She recommends that advisers discuss health care options with their clients before the seven-month Medicare enrollment period that begins three months before the client's 65th birthday — and revisit their choices periodically as part of their annual financial review as their health situation evolves or their Medicare plan options change over time.
In addition to Allsup, Goodcare.com offers similar Medicare advisory services for financial planners and consumers. They also help these clients make decisions from difficult choices regarding long-term-care financing and placement decisions.
Perhaps the most important advice financial advisers can offer their clients is to work toward something that is often within their own control — staying healthy — said Carolyn McClanahan, a financial planner and medical doctor.
You might start by urging your clients to try one of the online life expectancy tools, such as Living to 100, as a wake-up call about how their lifestyle choices today, such as diet and exercise, can affect their health and their health care costs in retirement.
