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Why is that retirement plan ticking?

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The news on health care costs for retirees is bleak.

According to Fidelity Investments, a 65-year-old couple retiring in 2012 will need $240,000 in after-tax savings to cover medical expenses in retirement. These costs have been increasing by an average of 6 percent annually since Fidelity’s first calculations in 2002 and do not include potential long-term care (LTC) expenses. 

The U.S. government’s budget woes could further increase retirees’ health care expenses.

In their search for cost savings, legislators frequently consider Medicare revisions. Many of those changes, if implemented, would result in higher out-of-pocket charges for Medicare recipients.

Of course, LTC costs remain a critical issue for seniors. MetLife’s 2012 Market Survey of Long-Term Care Costs found that national average rates for a nursing home private room increased by 3.8 percent from $87,235 annually in 2011 to $90,520 in 2012. Over the same period, national average annual rates for a semi-private room increased by 3.7 percent from $78,110 to $81,030.

Some advisors call health care planning the “new retirement planning.”

While that might be an exaggeration, there’s no denying that health care costs will affect your clients’ finances. Senior Market Advisor asked several health care experts for their insights on the major challenges seniors will encounter in 2013 and how advisors can guide their clients.

The problem

Fidelity compared Social Security’s average cost of living adjustment of 2.3 percent with an assumed average 6 percent annual increase of health care costs for retirees nationally.

The comparison found that 65-year-old couples retiring in 2012 with a $75,000 household income should expect that 35 percent of their annual Social Security benefit about $10,476 could be needed for health care expenses today. In 15 years or by 2027, their allocation of Social Security benefits going to health care expenses is likely to almost double to 61 percent of a $41,205 annual Social Security payment, or about $25,000 a year.

Sunit Patel, senior vice-president, Fidelity Benefits Consulting Group in New York, notes that much of the health care expenditure is a fixed liability. In other words, it doesn’t change with someone’s retirement income. However, retirees do have some cost-control measures available.

“I think that to the extent individuals can obviously maintain their health, improve their health, (or) if they’ve got a chronic condition to make sure that they’re going to manage it effectively I think all of that can help mitigate some of those costs,” Patel says. “When they go to purchase health insurance, I think they can try to make optimal decisions and look at the different products that are available in the market because there is quite a range of products out there.”

Larry Sinsimer, senior vice-president for practice management with Fidelity in Boston, urges advisors to educate their senior clients on how Medicare works and their potential health care costs.

“People tend to really underestimate what their total cost is going to be,” Sinsimer says. “They’re going to have to create a way to fund retirement in a way that’s going to account for that rising cost. The other thing that’s important to help their clients understand is (that) Medicare doesn’t kick in until 65. To put that in context, if you have a married couple age 62 (and they) want to buy a $2,000 annual deductible (policy) at a $1 million lifetime coverage, the premium is $2,000 a month.”

Where a retiree chooses to live is another key issue advisors can address with clients because Medicare supplement policies’ prices vary significantly across the country. Another factor: finding doctors who still participate in Medicare. Sinsimer says that a growing number of doctors, especially in popular retirement spots, will not accept Medicare. That’s led more retirees to consider concierge medicine, which then becomes another health care expense to plan for.

“So I pay $10,000 a year to a medical practice just for the right to see the doctor and they may or may not take my insurance and Medicare,”  Sinsimer says. “Even though Medicare only covers less than two-thirds of what we think the total outlay is going to be in retirement, you may need to fund 100 percent depending on where you’re moving to.”

Medicare changes

More on this topic

The Pew Research Center in Washington estimates that 10,000 baby boomers will reach age 65 every day through the year 2029. That demographic shift means that Medicare issues will be a primary source of medical insurance for more of your clients. So what changes in the program can seniors expect this year?

Dr. Rhonda Randall, chief medical officer of United Healthcare Medicare & Retirement in Orlando, Fla., highlighted the following changes resulting from the Patient Protection and Affordable Care Act (PPACA):

  • Medicare now offers additional preventive services to improve beneficiaries’ health and well-being. In 2013, Medicare Part B covers eight face-to-face counseling sessions for people who want to stop smoking, as well as obesity screening and intensive counseling for those who screen positive for obesity.
  • People who have original Medicare will now find an easier-to-read summary of benefits. Last year, Medicare redesigned its quarterly summary notices for Parts A and B to use simple, understandable language, definitions and large font, making it easier for people to navigate their health benefits. The notices also include step-by-step instructions on how to review the materials for accuracy, make an appeal or report potential fraud.
  • People enrolled in Medicare Part B will pay less for outpatient mental health treatment. Beneficiaries will pay 20 percent of the Medicare-approved amount for an initial diagnosis, and then pay 35 percent for outpatient treatment, such as counseling or psychotherapy, while Medicare covers the rest.
  • Medicare also covers an annual wellness visit where beneficiaries and their primary care doctors can develop a plan to help them stay healthy. While not a new benefit in 2013, the annual wellness visit is something that more beneficiaries should take advantage of because it gives them an opportunity to discuss their preventive-care needs with their doctor and determine if they’re on track to maintain their health. This annual benefit is available for no co-pay. Medicare Advantage plans also cover this annual wellness visit, and some cover a full annual physical as well.

The “doughnut hole” for the Medicare Part D drug benefit has been a coverage gap for many retirees, according to David Lipschutz, policy attorney with the Center for Medicare Advocacy Inc. in Washington.

That gap is scheduled to close by 2020, resulting in cost savings for some recipients. However, says Lipschutz, certain higher income individuals will be paying more in premiums for their Medicare Part B and Part D services as a result of expanded means-testing based on income. (Income-relating the Part B premium began in 2007 pursuant to the Medicare Modernization Act of 2003, which also created the Part D prescription drug benefit.)

“People who are at this income level, $85,000 for a single individual and $170,000 for a couple, pay a greater share of their Part B premium, meaning they pay more,” he explains. “The Affordable Care Act also extended this dynamic to the Part D prescription drug benefit, meaning people on that same income range and above will be paying more for their Part D premiums if they have a Part D plan. The same bill also froze these income thresholds through 2019.”

Advising clients on Medicare policies

Changes to Medicare are set for 2013 and changes proposed for 2014 won’t be known until August or September, says John Barrett, owner of Health Insurance Brokers in Pasadena, Calif.

Among likely changes are cuts in government reimbursements to insurance companies for Medicare Advantage policies; those cuts may result in higher costs to policyholders. Given Medicare’s complexity, Barrett says advisors need to be proactive, not reactive, in monitoring the program’s changes and their potential effect on clients’ coverage.

“In my experience 95 percent or more (of seniors) really are confused about Medicare,” Barrett says. “They’re confused about what it covers. They’re confused about all the gobbledygook. They’re confused about all the fliers that they get before 65. My job as a broker is to lift that fog of confusion, to be able in simple language explain to them what Medicare does and what it doesn’t do. (For example), why somebody would put a Medicare supplement or a Medigap plan with Medicare to fill in the gap (or) why someone would use a Medicare Advantage plan or a Medicare Supplement plan or vice versa.”

Barrett points to several online resources that can help advisors monitor Medicare. He writes and regularly updates a blog and distributes a newsletter that provides ongoing coverage of health insurance news and trends. Other news sources he suggests tracking are Politico and Investors Business Daily.

Long-term care insurance

Long-term care insurance generally will see a continuation of trends from past years. On the legislative front, the CLASS Act has been officially put to rest; a new Congressional Long Term Care (LTC) Commission will study the long-term care issue.

Clients’ exposure to the cost of LTC services has been well documented for years as have been the ups-and-downs of the LTC insurance industry.

Nonetheless, Jesse Slome, executive director of the American Association for Long-Term Care Insurance (AALTCI) in Westlake Village, Calif., believes 2013 will be a good year for LTC insurance policy sales to qualified prospects. For starters, the economy’s gradual improvement boosts consumers’ confidence and willingness to consider discretionary expenditures such as LTCI premiums. As evidence of the public’s renewed interest, Slome notes that monthly consumer traffic to the AALTCI’s website is roughly double last year’s volume.

Hybrid policies look to remain another growth area, particularly as advisers become more creative with the policies’ applications. Most agents view the traditional versus hybrid policy decision as an either/or situation, says Slome, but he’s finding that some of the more analytic LTC advisors are having clients own both types of policies. The combinations can provide innovative, customized benefits that are successfully attracting buyers. “It’s much more of a holistic approach to addressing both the risk and the need and how people think about buying something they might not use,” he says. “It makes a whole lot of logical and sales sense.”

But there are also reasons to be cautious, Slome warns. LTC insurers have been raising their rates, largely in response to historically low interest rates. While increased rates should bring longer-term stability to coverage availability and prices, they also make the product less affordable for prospective buyers.

Another factor: the growing role of online searches for LTC information versus many LTC-agents’ lackluster marketing efforts on the Web. “Google is really the typical rank-and-file insurance professional’s greatest competitor,” says Slome. “Most agents have absolutely none or a poor online presence at the point where consumers now go to look for information and ultimately to find a viable insurance agent.”

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