As millions of American baby boomers and retirees grapple with the challenge of creating a secure income stream that may need to last 30 years or more into retirement, there is one area that must be at the forefront of every discussion: the potentially devastating impact of health care costs. This distinct paradigm shift in addressing health care is occurring in investment arenas across the country, as advisors, financial services executives and retirement industry thought leaders are starting to realize the importance of accounting for this variable in the retirement planning process.
Admittedly, I first came to this realization when I began taking care of my parents after they retired. I was unprepared for the exorbitant out-of-pocket medical costs that began to accumulate. There was a $2,000 hearing aid for my father, and twice-weekly ambulance trips for my mother’s dialysis treatment — not to mention $200-per-visit quarterly teeth cleanings recommended by their dentist. I had been lulled into a false sense of security, as millions of others currently are, that Medicare would cover these expenses. As I reflected upon my experience in financial services, I also knew that the very professionals who could have helped defray these costs were unaware of their true impact.
Given the seemingly endless scope of rising health care costs, it is the obligation of the financial services industry to provide the tools, products and personalized support to help Americans plan for a stable retirement. As the industry begins to move in the direction of a wealth/health connection, the firms that offer simple and direct solutions, embrace advisor training and integrate health care cost planning into a comprehensive retirement strategy will ultimately become the new industry leaders.
What’s the reality?
Health care costs can fluctuate greatly and will vary depending on the client’s age, health, lifestyle and when they begin Medicare coverage. For example, according to HealthView’s actuarial calculations, a healthy 65-year-old couple with Medicare coverage retiring in 2009 (with a life expectancy of 85) will need over $280,000 to cover medical expenses in retirement. However, if one spouse is diagnosed with Type 2 Diabetes, the couple’s health care costs will increase from $280,000 to $320,000. What happens if they both live to age 88? They will incur an additional $110,000 in medical expenses.
Let me provide another example to put some of the data into perspective. John and Mary are 57, married, healthy and plan to retire in ten years. John will likely live to 85 and Mary to 89. They will be fully insured with Medicare Parts A, B and D, as well supplemental insurance. Their out-of-pocket health care expenses during the course of their retirement will be approximately $587,000. To cover this, they will need $322,699 at the point of retirement growing at 5 percent per year. Remember: This is just to pay for health care.
Another way to look at it is to examine estimated annual health care costs at different ages:
Age Estimated Annual Cost
Savvy advisors who help clients recognize the potential impact of future health care costs can suggest products, re-allocate assets and discuss whether an increase in savings will be needed to address these costs.
In my conversations with advisors and clients, many are surprised and confused to learn than Medicare does not cover all of their health care expenses when they retire. Advisors often feel unprepared because they don’t have the knowledge about how Medicare works. Comparatively, just as many advisors may not be able to explain the intricacies of Modern Portfolio Theory in their investment management efforts — but they don’t need to know all the ins and outs of Medicare to help their clients. They simply need to understand the basics.
Let’s review some of those fundamentals. According to the Employee Benefit Research Institute, Medicare covers 51 percent of expenses associated with health care services. Individuals are responsible for covering the other 49 percent. The Medicare website also states: “It’s important to understand that Medicare does not cover everything and it does not pay the total cost for most services or supplies that are covered.” Here are just a few of the services and equipment not covered by Medicare, but very much in demand especially as we age:
- Eye exams
- Eyeglasses or contact lenses (generally)
- Routine hearing exams or hearing aids
- Routine dental care or most dental procedures such as cleanings, fillings, tooth extractions or dentures.
- Dental plates or other dental devices
- Long-term care
Another little-known fact about Medicare is that it is not available until subscribers turn 65 years of age. If a client retires at 64, he or she will most likely not have the employer-sponsored health care coverage they had when they worked. The following example underscores the magnitude of health care expenses and the importance of employer-sponsored health care:
A 64-year-old male who retires one year before becoming eligible for Medicare would incur annual medical expenses — including premium payments and out-of-pocket expenses — of $6,160. If he remains working and has employer-sponsored healthcare, his annual medical expenses would be around $2,643. This kind of information catches both advisors and their clients by surprise, but it quickly becomes apparent that planning for these costs needs to take center stage.
The agent takeaway
When clients retire, they can buy a less expensive car, downsize their home or take fewer vacations, but they simply cannot eliminate medications or cut back on health services. Advisors need to have that conversation with clients to help them realize that health care is the linchpin of retirement planning.
This current industry void provides a vast and rewarding opportunity for advisors who become proficient in managing retirement assets and creating a secure income streams for retirees. In fact, a recent research report released by the Retirement Income Industry Association found that advisors who have invested the time and effort to specialize in this arena have had significant growth in their practices, with more than 7 in 10 advisors reporting an increase from retirement income clients in 2010. Part of that specialization requires a strong understanding of health care costs, Medicare, and the ability to prepare personalized calculations based on clients’ health, lifestyle and life expectancy.
Agents who embrace this emerging philosophy by integrating out-of-pocket health care expenses and personalized life expectancy calculations into the process will be positioned to provide a more customized product offering to their clients. Informed clients who know that health care may be the single greatest drain on their nest eggs will be more comfortable making decisions to address their needs. Agents can then tailor existing products, such as annuities or life insurance, to offset the projected health care costs, which will in turn lead to increased close ratios and ticket size.
Ron Mastrogiovanni is the president of HealthView Services, a software firm specializing in financial planning, retirement income management and health risk assessment tools and customized solutions.
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