Given longer lifespans and rising medical costs, health care has become a top concern among retirees – women most of all. In fact, expected health care costs in retirement are about $83,000 greater for women than men.
With greater longevity and smaller savings, however, female clients may have a tough time weathering these costs, particularly when they’ve taken time out of the workforce to raise families. Even among affluent women, the likely need for long-term care looms, threatening to wipe out savings and dishevel legacy plans.
While Americans do need to save more for retirement in general, they need an efficient strategy for planning for health care costs. Costs are rising at an unprecedented rate, but optimizing a portfolio to address health care needs will help combat inflation and reduce the burden on women and their families.
The effects of health care inflation
The official U.S. inflation rate is just under 2.5 percent, but health care costs are rising far faster – 5.47 percent, according to HealthView Services. Likewise, Social Security’s cost of living adjustment averages 2.6 percent, even though medical costs disproportionately affect seniors.
While Medicare’s “hold harmless” rules prevents the Part B increase from eclipsing the COLA, that rule doesn’t apply to high-income earners, nor does it affect increases on supplemental health policies.
“Someone’s Social Security benefit might have gone from $1,500 to $1,520 this year, for example, but their overall Medicare expenses increased much more,” says Heidi Hanson, financial services representative with Baystate Financial.
As a result, insurance premiums and out-of-pocket costs are roughly $280,000 in today’s dollars for a 65-year-old retiring man and $362,000 for a 63-year-old woman. Due to increasing lifespans and inflation’s compounding effects, today’s 55-year-olds can expect to spend an additional $7,000 to 8,000 in their last two years of life.
How should clients prepare for these costs?
“We think about health care in terms of three ‘buckets,’” says Laurie Barry, senior vice president of wealth management at UBS Wealth Management. “There’s pre-Medicare for clients who retire before 65, Medicare costs and long-term care. We plan for these with different parts of their portfolios.”
Likewise, sound retirement plans often include three segments: liquidity, longevity and legacy.
“65 percent of our clients from our investor report survey say they have different asset allocations for each of those buckets, and over 50 percent focus most on longevity,” says Barry.
That longevity portion is typically earmarked for individual insurance, Medicare premiums and long-term care. The earlier a client plans to retire, the more it will need to contain. Depending on their longevity and proximity to retirement, it may also need to be heavy on riskier, growth-oriented investments that can outpace health care inflation.
“The time we have determines our asset allocation, and we choose investment vehicles based on each woman’s accessibility – an employer match for an HSA, for example,” Barry adds.
On that note, match or no match, the HSA is one of the best tools for efficiently covering health care costs in retirement. One of the only vehicles to offer tax-free contributions, growth and withdrawals, it can be used for out-of-pocket expenses any time, and it can cover Medicare premiums in retirement. “Save as much of that money as possible for retirement,” Hanson advises.
Aside from HSAs, 401(k)s and IRAs, annuities are a solid option for clients with cash to spare.
“If we have the money, we can set it aside in an annuity vehicle with tax-deferred growth,” says Hanson. Along with an inflation protection rider, that growth can help clients withstand the effects of health care inflation. Plus, lifetime payouts will enforce Social Security’s existing protection.
Try as they might to plan, some clients will still face large, unexpected medical bills. An illness or injury may occur in the gap years between retirement and Medicare eligibility, or a long hospital stay, surgery or overseas emergency may not be fully covered by their supplemental plan.
This is where that liquidity “bucket” comes into play.
“We typically suggest that women have anywhere from one to three years of needs saved in that bucket,” says Barry. “Assuming they’re not still employed and don’t have access to loans on their 401(k), the best option would be a cash reserve.”
Medical care and other major expenses are all the more reason to save or convert to a Roth IRA, which can be drawn upon tax-free. Those funds may be bestused for longer-term needs, but if a client is in a bind, Roth distributions are far more tax-efficient than additional withdrawals from a 401(k) or traditional IRA.
The likelihood of long-term care
“Female clients have longer life expectancies – typically six years longer, according to the World Health Organization – and they’re more likely to need long-term care, whether it’s in an institution, nursing home or in their own homes,” says Barry. In fact, roughly 70 percent of nursing home residents are women.
The projected $362,000 a retiring woman will spend on health care doesn’t include those LTC costs, either. Expenses vary wildly by location and level of care, but full-time care in any region will be at least a five-figure affair. If those costs aren’t covered ahead of time, they’ll invariably detract from a client’s legacy plans.
“There are basically three ways clients address long-term care,” says Barry. Some self-insure, choosing to live with the risks and perhaps earmarking inheritances for potential costs; others look for maximum protection; and still others find minimal coverage.
For clients seeking maximum coverage, “I always present the standalone and hybrid options and let them decide,” says Hanson. Standalone LTCI tends to offer more robust coverage, but like car and health insurance, you use it or lose it. Hybrid life insurance policies, on the other hand, offer substantial death benefits andlong-term care coverage, but not to the degree of standalone policies.
Getting a head start
Whatever strategies and savings vehicles a client chooses to cover health care costs, planning early is always a safe bet.
“The earlier women have these conversations, the more options they’ll have,” says Hanson. “Applying for long-term care insurance at 55 gets you a better premium than at 65, for instance, and 45 to 50 is really the sweet spot for applying.”
“This conversation is happening younger and younger, as people see their parents age and see what health care costs,” Barry adds. “As long as women are educating themselves and having that conversation, they’re doing the best they can to make good decisions.”