If the aphorism “an ounce of prevention is worth a pound of cure” is true of health care, it is surely also true of health care finance.
For that reason, financial advisors need to do for their clients what good doctors do for their patients: Plan now to prevent unwanted future problems.
Yet according to a new white paper by HealthView Services, most advisors fail to plan adequately for their clients’ health care costs.
In this regard, advisors are not fully meeting their clients’ needs while at the same time are missing an opportunity to forge deeper relationships with clients by addressing their genuine “pain points” — to extend the medical analogy.
And fears over health care affordability are apparently a key source of pain for American pre-retirees, 62% of whom are “terrified” of what health care costs will do to their retirement plans, according to a survey cited in the HealthView white paper, titled “Closing the Retirement Health Care Costs Planning Gap.”
The advisor-oriented provider of retirement health care data and planning tools explains both the reasons why Americans are gripped by this terror, and importantly, what advisors can do to raise their level of professionalism in order to address their clients’ concerns.
Bracingly, the white paper illustrates retirement health care terror with the example of a 75-year-old woman without supplemental insurance who develops a medical condition requiring multiple surgeries.
Lamentably, none of her options are good ones. She can include paying for these costly procedures with savings; tap into home equity — that is if she has a home and the home has equity; not pay, risking debt collection with added interest; or not get treated, thus forfeiting a better quality of life.
That’s a scenario that advisors and clients should desperately seek to avoid — and can avoid, with even just five to 10 years of employment left during which clients can ratchet up their savings.
Unfortunately, Americans often believe they are incapable of increased savings, and their advisors “may hesitate, or find it unrealistic, to ask clients to save even more,” the whitepaper asserts.
Indeed, a comprehensive HealthView study on retirement health costs released last month put the total lifetime health care tab at $395,000 for a couple retiring this year at 65, consuming 70% of the couple’s lifetime Social Security benefits. A couple retiring in 10 years can expect 98% of their Social Security benefits to be consumed by health care costs.
That stark statistic comes into sharper relief when one considers that Medicare Part B is deducted directly from most retirees’ Social Security checks, thus shrinking the payment.
Further slimming down Social Security paychecks is the trend toward thinner cost of living adjustments, or COLAs, which averaged around 4.5% annually from 1975 to 2008, but have averaged 1.7% from 2009 to 2014—even though health care inflation, now at about 4%, is anticipated to rise to an average of 6% in the coming years.
Facing such inordinate expenses and tighter retirement income, according to HealthView, “the question isn’t ‘Can Americans afford to save for health care?’ It is “Can Americans afford to not save for health care?’”
To that end, advisors must help clients confront health care reality. HealthView estimates that a couple 10 years away from retirement at age 65 “and saving $466 per month for 10 years will be able to cover, at minimum, Medicare parts B and D during retirement. By saving the modest amount required to cover basic costs, the couple will be less likely to have to draw upon assets that have already been allocated for other household needs or discretionary spending in retirement.”
The health care data provider notes that these averages understate the costs to wealthy Americans because of recent regulations that essentially means-test Medicare such that individuals with modified adjusted gross income (MAGI) of more than $85,000 or couples with incomes exceeding $170,000 will pay Medicare surcharges, raising costs from 35% to over 200%.
The whitepaper addresses other issues, such as updated mortality tables, that tend to suggest additional reasons why health costs could be higher than anticipated by Americans who grew up in a world of generally lower health care costs, higher Social Security and Medicare benefits, lower inflation, more secure pensions and the like.
Existing retirement planning tools and strategies — such as the 80% of final-year earnings rule or the 4% annual retirement withdrawal rate—are inadequate to help clients navigate this tougher financial environment, the paper argues.
Rather, HealthView advocates a deeper client conversation and planning process. That plan should start with an estimate of future costs and a savings plan commensurate with those costs — or a plan that explicitly deducts them from Social Security.
Next, advisors should see how health savings accounts, nonqualified annuities and life insurance can meet client needs, while examining how wealthier clients can nudge down their MAGI through whole life insurance or Roth IRAs in order to avoid costly Medicare surcharges.
An advisor with health care expertise would also weigh the timing of Medicare enrollment, the relative merits of various supplemental insurance plans, the impact of state residency on supplemental insurance costs, how selling a home would affect MAGI and long-term care planning.
Such an advisor should also understand how illness, the death of a spouse and change of residency may bear on his clients.
Bearing all these factors in mind, an advisor should create a decumulation plan and monitor the clients’ progress through regular reviews.
At the same time as it released its whitepaper, HealthView has made available on its website free consumer-oriented retirement health care planning tools.
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