Protecting Your Clients’ Portfolios From Unpredictable Expenses

Long lifespans and drawn-out retirements have also made medical care a greater concern for seniors, and that care isn’t getting any cheaper. “When it comes to unpredictable expenses, healthcare is kind of the elephant in the room,” said Frazzita. “Medicare changes coming online in the next couple of years are going to increase out-of-pocket expenses, and costs are rising even for people who aren’t yet retired.”

While Part B premiums remained the same this year, surcharges will be withdrawn from the Social Security checks of individuals earning $85,000 or more and couples with incomes of $170,000 or more, according to the SSA. The lowest surcharge is $42 on top of the monthly Part B premium, and the largest is $230.80 for couples with incomes greater than $428,000.

What makes this system unpredictable is Medicare’s modified adjusted gross income calculation, which involves almost every possible source of earnings, and which takes into account income earned up to two years prior to signing up for the program. And, while the surcharges have been in place since 2007, the income brackets aren’t inflation-adjusted. Without proper advisement, middle and upper middle class retirees who assumed they wouldn’t fall into a “high income” bracket may be in for an unwelcome surprise. As more seniors fall into those unadjusted brackets in years to come, meticulously planned asset draw-down strategies will become crucial for minimizing surcharges and retaining Social Security benefits.

Aside from well-planned withdrawals from tax-deferred and taxable sources, however, there are still a few sources of income that don’t count towards the Medicare income calculation – namely the Health Savings Account. “If a client is still working, especially if they’re on a high deductible plan, they should consider contributing to an HSA,” said Marilyn Timbers, Voya Retirement Coach. “Once they’re in retirement, preparing is just a matter of being aware of what the additional expenses can be and preparing for those.”

Some clients may worry that their HSA contributions will be for naught, but between gradual rises in premiums, deductibles and co-pays, surcharges that will affect more seniors each year, and the additional costs of Medicare supplements and private insurance, there are more than enough healthcare costs to cover in retirement. A 2014 Fidelity study actually found that the average couple retiring at 65 would need roughly $220,000 to cover medical expenses in retirement, and the current yearly HSA contribution limit is just $6,650 per family. Still, for clients who prefer other options, 401(h)s, Roth plans, income from cash-value life insurance policies and earnings from reverse mortgages are also exempt from the Medicare income calculation.

The Likelihood of Long-term Care

If a client needs another reason to consider an HSA, long-term care is it. “Long-term care might be the biggest of all retirement expenses,” said Olavsrud. “With medical advancements keeping people alive longer, there’s a much greater likelihood of needing it.” Medicare won’t pay for long-term care, but according to the IRS, long-term care insurance premiums do count as qualified medical expenses.

As for the specifics of the policy, “We highly recommend going with a credit-worthy company, since this is decision that may not pay out until decades in the future,” said  Olavsrud. “A cost of living adjustment is also well worth the expense, and you need to look for features like how long the policy will pay out, what kinds of services it covers and what the daily benefit will be.” Hybrid life and long-term care policies also allow death benefits to be drawn upon for long-term care, and customers often have the option to pay up front, annually or monthly.

While seniors are often reluctant to purchase long-term care insurance , or even consider the prospect of needing it,  it’s a clear choice for clients who can afford it. The US Department of Health and Human Services has estimated 70 percent of people currently 65 or older will need some form of long-term care, and paying for it out-of-pocket can wipe out even sizable portfolios depending on the services required.

Sticking to a Long-Term Plan

Long-term care, medical bills and longevity-heightened market risks may be tough to predict, but clients can drastically improve their retirement prospects by sticking to well-planned budgets and investment strategies before and after they retire. “It’s mathematically impossible to live on more in retirement than you earned when you’re working,” said Seth Deitchman, Mercury Group Portfolio Manager. “When we’re trying to plan for a successful retirement, it’s actually easier to plan for someone with a smaller budget than a larger one.” When working with the well-off clients who have the most to lose, advisors must understand their expenses, establish sustainable budgets and advise flexible investments that will pay off whether or not those unpredictable expenses come to pass.