An ordinary 55-year-old boomer with an annual income of $60,000 today could end up spending more than $3,000 per month on out-of-pocket health care expenses by 2045.
That figure includes a basic health care cost inflation rate of just 5% per year and does not include the cost of long term care insurance.
Projections like those explain why financial services companies are starting to promote the need for retirement health expense planning as well as retirement income planning.
Today, “advisors are actively preparing to help an aging client base shift from asset accumulation to distribution,” says Marty Willis, executive vice president of the institutional services unit at Fidelity Investments, Boston.
Fidelity just published a survey report charting the shift toward efforts to help retired and nearly retired baby boomers squeeze monthly retirement checks from their nest eggs, away from efforts to help working boomers save for retirement.
When Fidelity surveyed 334 advisors in June, it found that about 43% of the advisors’ clients are either retired or less than 5 years away from retirement.
Fidelity has been a leader in efforts to promote the concept of retirement health savings accounts.
But a recent Web search for the phrase “retirement health planner” and several similar phrases returned no hits. Discussions of strategies for matching retirement health liabilities to specific streams of income are rare.
Meanwhile, researchers at AARP, Washington, have estimated that U.S. boomer couples with annual household incomes over $45,000 spent an average of about $3,785 per year, or about $315 per month, on out-of-pocket health care costs in 2003.
The Medicare trustees are assuming average annual rates of 2.8% for general inflation, 5.1% for health care cost inflation, and about 14% for a list of core Medicare out-of-pocket costs, such as Medicare insurance premiums and coinsurance payments.
Suppose John Doe, a married boomer executive, retires today with an annual household retirement income of $60,000 per year. Careful investing helps Doe and his wife increase their income about 5% per year, while core out-of-pocket Medicare costs rise 14%, and the cost of dental care and vision care rises 5% per year. Under those conditions, out-of-pocket acute-care costs could take almost 9% of Doe’s $400,000 annual income in 2045, up from about 6% this year.
Investment strategies for retirees who want to plan for this kind of health care cost inflation may be complicated by the fact that health care inflation has been so much higher than general inflation.
Some boomers may decide to cope by investing in ordinary diversified portfolios, while others might prefer to add extra allocations of Treasury Inflation-Protected Securities and health sector investments, in the hope that rising health sector investment values will offset rising health care costs.
Many retirement policy experts have been promoting use of inflation-indexed, fixed, lifetime annuities to help boomers fund retirement expenses.
In the advisor community, income annuities already rank fifth in popularity as a general income planning tool; 37% of the advisors Fidelity surveyed for its income planning study said they are recommending those products to older clients.
The Vanguard Group, Valley Forge, Pa., has posted a quote calculator for lifetime, inflation-indexed annuities backed by a unit of American International Group Inc., New York, on its Web site.
A 55-year-old male boomer who lives in Arizona and wants to fund $3,800 per year in health care expenses with an inflation-adjusted lifetime annuity may have to put in about $90,000 in premiums, according to the Vanguard calculator.
The AIG/Vanguard annuity limits inflation adjustments to 10% and ties the adjustments to the general inflation rate.
If the 55-year-old Arizona resident wanted to guard against high increases in Medicare out-of-pocket costs by arranging for $6,000 in annuity payments, he would have to contribute about $140,000 in initial premiums.
Although Vanguard advertises inflation-indexed annuities, for now, “inflation-indexed annuities are very rare in the private insurance market,” Virginia Reno, vice president for income and security policy at the National Academy of Social Insurance, Washington, testified in June during a House Ways and Means Committee subcommittee hearing.
The federal government could improve the supply of inflation-indexed annuities by increasing the supply of 30-year Treasury Inflation-Protected Securities, to help insurers hedge inflation risk, Reno said.
“Alternatively, the government could sell inflation-indexed annuities directly to retirees,” Reno said.
Although true inflation-adjusted annuities are rare, many insurers offer annuitants the option of structuring payments in such a way that benefit amounts will increase each year.
One insurer, Jackson National Life Insurance Company, Lansing, Mich., advertises an “Income Escalator” option that can guarantee immediate annuity benefit payments will increase 3% each year.
Another insurer, a unit of StanCorp Financial Group Inc., Portland, Ore., offers a feature with single-premium immediate annuities that can provide pre-set annual increases ranging from 2% to 5% per year.