Baby boomers planning for retirement have a lot of financial issues to weigh: where to invest funds for one’s golden years; how best to spend down assets while minimizing portfolio risk; what to set aside for travel and other leisure activities; and establishing a legacy for the next generation.
Often overlooked in retirement income planning is one wildcard that could affect all financials, and has potentially catastrophic consequences. That variable is health care costs. If you’re not considering these expenses as part of your retirement planning, you should be.
One company that does factor health care costs into retirement planning is Edward Jones, the Missouri-based financial services firm with a branch network of more than 12,000 locations servicing 7 million clients and $914 billion in asset under management worldwide. Catering to individual investors and small-business owners, the company recently unveiled a survey of more than 1,000 non-retired and retired Americans on health care costs in retirement. Conducted by ORC International, the CARAVAN Omnibus survey reveals these expenses to be a significant — and growing — worry of respondents, most especially boomers nearing retirement.
“There are usually two inter-related concerns that rise to the surface when we do surveys on retirement,” says Scott Thoma, a principal and investment strategist for Edward Jones. “One is running out of money. The second is paying for health care expenses.”
On the latter count, apprehension is widespread, most especially among the 78-million-strong baby boomers, many of whom are now retiring. Nearly 7 in 10 (69 percent) of the boomers polled say they’re “concerned” about retirement health care costs; 41 percent note they’re “very concerned.” In contrast, less than 1 in 5 (19 percent) of millennials expressed unease.
Boomers’ fears are not displaced. A recent survey from HealthView Services, “2016 Retirement Health Care Costs Data Report,” pegs health care costs for a 65-year-old healthy couple retiring today at $288,000. When you add dental, hearing, vision and other out-of-pocket expenses, the total retirement health care bill rises to $377,412 — a lot of money from, say, a $1 million nest egg.
One reason for the big tab: fast-rising health care costs (up 7 percent last year), which is outpacing the general inflation rate (0.7 percent). The biggest contributor to increasing health care costs is Medicare Part B, which covers hospital and doctor visits. These costs rocketed 16.1 percent last year.
All worrisome numbers, to be sure, but not necessarily as difficult to manage as the aggregate costs suggest. The key to preparing for unexpected physical and mental ailments later in life, says Thoma, is proper planning. That starts with breaking projected health care costs into smaller chunks, to wit: estimating the outlay on annual basis.
“If you look at the average expenses for an individual in retirement, based on premiums for Medicare, our estimates peg the total at from $4,500 to $6,500 per year,” says Thoma. “These to me are much more manageable amounts.”
They’re costs, too, that an advisor can help clients cover with protection products in situations where they’re unwilling or unable to dip into retirement assets to fund out-of-pocket health care costs. Among the solutions available are stand-alone long-term care and critical illness insurance, as well as linked-benefit life insurance and annuities that come with optional LTC, critical illness and chronic care riders.
The latter hybrid products are increasingly in demand among prospects, particularly middle income Americans who cannot afford the premiums of stand-alone policies and are looking to offset a portion of medical or long-term care costs in retirement.
LIMRA's 2015 Individual Life Combination Products Annual Review, unveiled last April, shows that new premiums for such combo products totaled $3.1 billion in 2015, representing 15 percent of all new premium collected for individual life insurance products.
The study found that products with chronic illness acceleration riders grew 38 percent in 2015, accounting for 59 percent of the combination life insurance market. Products with long term care acceleration riders experienced stronger growth in 2015, up 51 percent from prior year, but only represent 28 percent of the market.
Though popular, the dual-purpose solutions may not always be adequate to meet health care or related expenses not covered by Medicare, hence the need to carefully analyze contract provisions, particularly those detailing when the policies will pay out — and when they won’t.
“Clients need to know for certain what’s covered under these policies," says Thoma. “Often, they conflate chronic or critical illness with conditions, like dementia, that require long-term care. The policy on offer may only be valid for one of the conditions, or only those deemed permanent or terminal.”
Clients also need to consider tax-efficient strategies for covering health care costs in retirement. Modified adjusted gross income (MAGI) is a critical factor here.
Minimizing MAGI is key to lowering one’s income tax-bracket (thus freeing up funds for health care costs that would otherwise go to Uncle Sam); and to avoiding a 3.8 Medicare surtax slapped on tax filers with higher incomes ($200,000 for unmarried individuals and $250,000 for married couples filing jointly). Depending on one’s income, the surtax can potentially run to tens of thousands of dollars.
Tax-favored insurance products, notes Thoma, aren’t the only vehicles for minimizing modified adjusted gross income. Other tax-free options include health savings accounts (HSAs), health reimbursement accounts (HRAs) and Roth IRAs, all of which are not counted as part of MAGI.
“There are a number of options clients can use to try to reduce their MAGI,” says Thoma. “Come 2018, Medicare surcharges could affect more people than this year, so clients should be looking seriously at these tax-favored accounts.”
To help advisors and clients navigate these and other health care-related planning options, he adds, Edward Jones avails its 14,000-plus insurance and financial services professionals of planning tools. Among them: Financial Foundations, proprietary software that can project future health care expenses annually in retirement using different medical scenarios and inflation rates.
“The advisor can carve out, for example, three years of long-term care expenses as a separate line-item, then determine if the client’s budget can support the cost,” says Thoma. “If not, they can plug in premiums for a long-term care policy and decide whether and to what extent offloading the financial risk to an insurer makes sense.”
“Long-term care is an important component of planning, but it’s only piece of a larger discussion focusing on sources of income to meet projected retirement expenses, including Social Security,” he adds. “Whatever the client’s objective in retirement, the software can provide a realistic picture of what that looks like and show how protection products can help them stay on track.”
Such protection may be especially needed should the client be diagnosed with Alzheimer’s, the most common type of dementia. The Alzheimer’s Association estimates the number of Americans afflicted with the disease in 2016 at 5.4 million, a number that’s expected to triple by 2050.
For family members and friends caring for those with ALZ, the impact on personal finances can be high: Nearly half (48 percent) of care contributors cut back on their own expenses — including basic necessities like food, transportation and medical care — to afford ALZ-related care, while others must draw from their own savings or retirement funds. More than one-third of care contributors lost income due to employment disruption.
Out-of-pocket spending for health care for people with dementia, including Alzheimer’s, is more than three times the out-of-pocket expenses for people of the same age without dementia, notes Beth Kallmyer, vice president of constituent services at Alzheimer’s Association.
Edward Jones recently partnered with the Alzheimer’s Association in an effort to support awareness of the disease and advance research, committing $4.7 million to support the cause. Funding through the partnership will enhance the Association’s care and support programs, including the 24/7 Helpline (800.272.3900) and provide educational materials on brain health as well as funds for critical Alzheimer’s disease research and grassroots awareness activities.
“Our partnership with the Alzheimer’s Association was one for reason for undertaking the survey,” says Thoma. “Expenses related to Alzheimer’s disease play into concerns about rising health and long-term care costs in retirement.”