Health Care in Retirement: How to Help Clients Plan

Faced with woes, “Gone with the Wind’s” Scarlett O’Hara optimistically vows: “I’ll think of it all tomorrow…. Tomorrow is another day.” Little Orphan Annie counts on tomorrow to dump the blues: “Tomorrow, tomorrow! I love ya, tomorrow!” And Fleetwood Mac’s hit implores: “Don’t stop thinking about tomorrow” (likewise Bill Clinton in his 1992 campaign).

Putting the focus on tomorrow means, of course, zeroing in on the future, largely unknown. For an increasing number of folks, tomorrow means retirement. How do your clients view tomorrow? What have you, as their financial advisor, done to help them deal with their future, perhaps 20 or 30 years long? How well are they prepared for the dollar demands of retirement?

This is important: The cost of health care is high and getting higher all the time. Do you factor into financial plans the estimated average $220,000 in out-of-pocket expenses—excluding dental and long-term care—that a couple, age 65, having retired in 2014, will need in order to cover whatever Medicare doesn’t throughout their retirement? Medicare pays only a little more than 50% of medical costs; retirees are obligated to foot the balance on their own.

The reality is that if FAs aren’t broaching the subject of saving for health care costs, it’s a good bet their retirement clients haven’t planned or budgeted for them. Either it’s never occurred to them, or they’ve simply pushed it out of their minds since the issue is essentially a downer with complex details.

“People keep their fingers crossed and hope they’ll make it by dealing with things as they come up,” says Joshua Kadish, a partner in RPG-Life Transition Specialists, financial planners in Riverwoods, Illinois.

But ad-libbing is walking a tightrope. Increasingly steep medical costs are a fact of life. These can include emergency expenses for surgeries required because of a critical illness or accident.

“Health care costs are like college costs because they go up twice as high as inflation. For the last decade, medical inflation and educational inflation have been about two times what regular inflation is,” says C. Richard Hearn, principal of Starcare, in Irvine, California. An LPL Financial branch manager, his practice consists primarily of clients with disabilities.

Hearn continues. “Health care costs go up 100% a decade, and we’re all living longer. So when you get into your eighth, ninth and even tenth decades, it gets darned expensive.”

Worried Wealthy

Compared to the general population, more high-net-worth retirees (60% vs. 41%) cite health care expenses as their top retirement financial worry, according to additional data released last December from Bank of America Merrill Lynch and Age Wave’s September 2014 study, “Health and Retirement: Planning for the Great Unknown.”

Further, the new analysis shows that affluent individuals are more likely to be proactive in caring for their health, such as exercising and sticking to a healthful diet. Plus: Wealthy people age 50 and over are almost three times more likely to try to estimate how much money they’ll need for health care and long-term care in retirement.

All of that presents a prime opportunity to discuss health cost planning with high-net-worth clients.

“Following healthful practices likely translates into how people handle their finances,” Kadish says. “If nothing else, they may be more open to taking the same approach with their [money] as they do with their health—understanding ailments and getting a prescription or workout regimen to improve the situation. We see that correlation with our clients.”

Kadish recommends bringing up health care expenses in the first meeting with every new client.

“You need to build these costs into their budget. We’re being ultra-conservative so that there’s some wiggle room just in case a catastrophic medical event occurs or there’s market downturn,” Kadish adds.

The good news for clients and advisors is the availability of a number of tools and solutions to help retirees set aside funds for health care expenses—or even reduce them. These allow FAs to create a financial blueprint for future medical care within the client’s overall retirement plan.

Admittedly, it takes finesse to start the oft-touchy health care conversation.

Besides, “the fallacy is that if you just explain to someone they need to [save] because the future is important, they’re going to change. But there are variant endemic differences in people—so there’s no one strategy for dealing with clients that’s going to work for everyone—and by [pre-retirement], people are pretty much hardwired for the way they think about the present versus the future,” says Lamar Pierce, associate professor at Olin Business School at Washington University, in St. Louis.

A study, “Healthy, Wealthy and Wise: Retirement Planning Predicts Heath Improvements,” that Pierce co-authored and released last summer shows how employees whose firms offer 401(k) plans think about tomorrow. The research found that people who contributed were more likely to correct indicators of poor health later revealed in company-sponsored medical exams.

“Existing retirement contribution patterns and future health improvements are highly correlated,” the researchers wrote, explaining that “retirement planning predicts employee health-improvement behavior.”

Diverse Structures

One route to saving enough to cover medical bills in later years is via a health savings account, introduced in 2005. The HSA typically is offered to employees who are enrolled in their companies’ high-deductible health plans.

Tax-advantaged, “the HSA is the fastest growing benefit structure that we see at Bank of America Merrill Lynch and in which advisors are taking an extremely strong interest to work with individual clients,” says Kevin Crain, BofA ML senior relationship executive, based in New York City.