We're lucky enough to live in a time of rapidly improving medical capabilities, but with it is an enormously increasing financial burden. A key question for financial advisors is how to best discuss the future cost of medical care with clients.
Most working-age clients find medical costs manageable. They tend to have good health insurance subsidized by their employer. When I go the doctor, my health plan requires me to pay him only $10 (it cost $15 dollars to park my car at the medical complex).
But upon retirement, things change. Despite Medicare, the cost of health care to retirees is high and getting higher. The Employee Benefit Research Institute recently projected the amount that people who retire in 2018 will need to accumulate by age 65 in order to cover health care costs. (For the full report, go to www.ebri.org and click Issue Brief #317, May 2008, entitled, "Savings Needed to Fund Health Insurance and Medical Care Expenses in Retirement: Findings from a Simulation Model.)
EBRI projects that a man currently age 55 will need to accumulate $132,000 by 2018 in order to pay for the average Medigap policy, Medicare Part B, Medicare Part D and average drug expenses if he lives to his life expectancy. For a woman, the figure is $181,000. For a couple, both age 65 in 2018 and living to life expectancy, the needed figure is $325,000.
But is it smart to prepare for the average? Half the population lives longer than life expectancy. If prescription drug consumption was assumed to be average, but a couple lived to the 75th percentile, necessary accumulation by age 65 would be $424,000.If longevity was in the 90th percentile, the needed accumulation would be $511,000. Remember, this does not include the cost of dentistry, or any out of pocket medical costs or medical equipment. Also, it does not include the higher spending for Medicare premiums required of more affluent people, even though some clients will be affluent enough to be categorized as higher income.
One more risk is worthy of consideration. Medicare has a long term deficit of over $30 trillion. Will adjustments be made? Without a doubt, and it will cost most of us far more than projected.
The issue for advisors is what to do with this information. Most clients have no clue about these likely costs. Most assume their costs will decrease as they get into their 80s and 90s. They also think they'll reduce spending in retirement. But in reality health costs will rise and won't easily be contained.
How much should the prudent person estimate health insurance and drugs will cost? Should a couple that turns 65 in 2018 plan for the average of $325,000, or should they assume average drug costs and longevity to the 90th percentile and anticipate the need to save $511,000? Or is it more prudent to assume above average expenses for drugs and longevity to the 90th percentile? EBRI estimates savings of $608,000 by age 65 will be required to pay for this last scenario. In my own situation, I prepare for high costs, because I would rather work longer than run out of money. How are you addressing this with clients?
The stakes are high. I recently interviewed a person whose father opted for an HMO in retirement, rather than Medicare, because the premium was lower. At age 90 the father fell and broke a bone in his hip and collar bone. Rehabilitation is crucial after these accidents, and Medicare offers excellent rehabilitation coverage. But the HMO denied it.
Having enough money for good medical care is essential for the elderly and requires significant savings. The cost is clearly a bitter pill to swallow. I think the EBRI analysis will help you and your clients better understand the savings needed.
Mathew Greenwald is president of Washington, D.C.-based Mathew Greenwald and Associates.