After expenses covered by Medicare are taken into account, many of your clients retiring this year are likely to incur about $240,000 per couple in out-of-pocket health care expenses during retirement. In 15 years, this amount will consume about 61 percent of their Social Security benefits. And some will live longer, incurring expenses above and beyond this quarter-million-dollar average. These figures cannot be ignored when you are working through estimated retirement cash flows, but how do you advise clients to cover these expenses on a fixed income? You may be able to alleviate the retiree health-expense problem by using guaranteed income annuities or life insurance alternative funding solutions.
Your clients have planned for retirement expenses, carefully tucking funds away into IRAs and 401(k)s. Despite this, many are likely relying on Medicare to cover the bulk of their health-related expenses after they reach age 65. Contrary to most of their beliefs, for the average retiree, Medicare will not be sufficient. A recent Fidelity Investments report found that a couple retiring in 2012 will need an additional $240,000 above and beyond the expenses Medicare does pick up.
Some of your clients can plan for these extra expenses by purchasing guaranteed income annuities and earmarking the funds specifically for health-related costs. For a lump sum, these guaranteed annuities will pay a monthly income for life, no matter how long your client lives.
This may be the most practical way to provide peace of mind for your clients. They can retire knowing that they will be able to pay for the surprising number of health-related expenses that are not covered by Medicare programs. The monthly annuity payment can allow your clients to purchase extra health insurance to cover their specific needs for the rest of their lives.
Life Insurance Option
If your client is averse to using an annuity strategy, he or she can use life insurance as an alternate funding solution. Your client can purchase a life insurance contract and use the cash value of the policy to pay health-related expenses during retirement. As the policyholder withdraws funds against the cash value of the policy to pay for health care, the death benefits will decrease. Any remaining value would be treated as any other life insurance policy payable on the insured’s death.
The advantage of using life insurance to fund post-retirement health care expenses is that the funds can be withdrawn as needed, where an annuity will pay out each month regardless of whether your client needs funds to pay health care expenses during that month.
Additional Planning Techniques
What if your client is considering retirement and does not have the funds to purchase life insurance or an annuity to guarantee lifetime income? The most important advice you may be able to give your clients relates to the expenses that remain outside Medicare coverage. Many of your clients assume that basic expenses relating to dental care and hearing aids are covered by Medicare. They are not. Neither is the rapidly increasing cost of long-term care.
If your client has not retired, knowledge may be the best planning tool. He or she still has time to re-examine anticipated retirement budgets and may be able to rethink planned expenditures. Further, those clients planning to retire before age 65 especially may want to rethink their strategy once they realize how high their health insurance bills are likely to be in the pre-Medicare years.
Contributing to health savings accounts (HSAs) can provide another solution for your clients who have yet to retire because amounts contributed to an HSA can be accumulated over the years and withdrawn tax-free during retirement. It may be possible for your clients to build substantial reserves within HSAs during their working years.
Your clients who have already retired should be advised to carefully examine their health plans each year to ensure that they are getting the most for their money. Plans change each year, so it is important that retired clients not assume that last year’s coverage will extend into the future.
The reality for most of your clients is that relying on Medicare will not be enough. Medicare will not cover a huge chunk of the health expenses that today’s retirees will encounter during retirement. Your advice is crucial to those considering retirement today—it is one area where knowledge really can be power.
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