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.
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.”