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6 questions about containing health care costs in retirement

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A new survey from HealthView Services, “2016 Retirement Health Care Costs Data Report,” pegs health care costs for a 65-year-old healthy couple retiring today at $288,000. When you add dental, hearing, vision and other out-of-pocket expenses, the total retirement health care bill rises to $377,412. The report also anticipates that a 66-year-old couple will require 57 percent of Social Security benefits to cover health care costs throughout retirement.

These add up to a very significant — and potentially overwhelming chunk — of a nest egg. To get a better handle on factors contributing to fast-rising health care costs, and what agents and advisors can do help clients minimize them in retirement, LifeHealthPro Senior Editor Warren S. Hersch interviewed Ron Mastroggiovanni, founder and CEO of Danvers, Mass.-based HealthView Services. The following are excerpts:

Hersch: What were the most surprising results of your survey?

Mastrogiovanni: Relative to the general U.S. inflation rate last year, which was around 0.7 percent, healthcare costs were rising at more than 7 percent. Typically, you don’t see this variance. U.S. Inflation is on average about 3 percent per years; healthcare increases range typically between 6 and 7 percent per year. When you have such a wide variance, that’s a major red flag.

Hersch: Why are healthcare costs so far outpacing the general inflation rate from year to year?

Mastrogiovanni: A major driver last year was Medicare Part B, which covers doctors’ visits and tests. It increased by 16.1 percent in the report — this after Congress weighed in and stopped Medicare Part B costs from rising even more.

Congress also found that the more insurance we have, both in pre-retirement and retirement, the more we use the system. If I’m retired and buy the best supplemental insurance policy on the market — referenced as “F” in our report — I’ll use Medicare coverage more than I would without the SI policy.

Deciding that they needed to make a change, federal authorities cut back on coverage that companies can provide under policy F. They believe that by placing more responsibility on our shoulders, people will use the system less.

We question whether this change is shortsighted. If people don’t take care of medical issues they have early on, they may drive up Medicare costs even more. Long-term, we expect healthcare costs to increase slightly, to more than 5 percent per year. This assumes that inflation will over time edge up to 3 percent.

Related: Analyst: Individual health rates likely to jump in 2017

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Hersch: By how much do you expect Medicare Part D costs to rise?

Mastrogiovanni (pictured at right): We’re looking at an 8 percent year increase there as well. A lot of states are trying to manage prescription drug costs, but there’s no data yet to support a lower forecasted Part D inflation rate.

When you combine cost increases for supplemental insurance, prescription drugs and the 3 percent rise in U.S. inflation, it’s hard to see how people in retirement can keep up. I believe the average American retiring today would need to allocate over 500 percent of their gross Social Security check just to cover healthcare costs. I always thought that my Social Security check would pay my basic living expenses, of which healthcare costs are a part. The reality is that it’s not going to.

Hersch: What actions are needed to slow the growth in health care costs?

Mastrogiovanni: One thing the healthcare industry needs more of is price transparency. This is such an important issue: Studies show that a simple MRI can vary in price by thousands of dollars between one institution and another. And the result of more expensive tests may be no better. People need to be aware of these substantial differences in costs.

This is especially true of the 20 percent of Americans who are in high-deductible plans. By making them aware of price differences, we can make a significant dent in growth rates of healthcare expenses.

Also, we need to be aware of differences in the quality of health care among institutions. People may be surprised to find how much better — not to mention more convenient — community hospitals are relative to larger institutions in the major cities.

Hersch: Absent the changes you propose, consumers are left to deal with rising healthcare costs. What steps can they take to better manage these rising healthcare costs with the help of a financial advisor?

Mastrogiovanni: Advisors definitely need to make clients aware of these rising costs. You cannot just ignore the largest expense most of us will face in retirement; putting our heads in the sand won’t solve the problem.

Second, advisors need to look at MAGI — modified adjust gross income — in retirement, a critical factor when it comes to costs. Assuming an inflation rate of 3 percent, a 40-year-old earning $40,000 per year will, when reaching age 66, occupy the second Medicare income bracket and pay a 36 percent premium surcharge on average for Medicare Parts B and D. The same 40-year-old, if earning $75,000 annually today, would pay a 201 percent surcharge. Depending on your age, you’re talking potentially hundreds of thousands of dollars.

As important as asset allocation today is product mix, as not all products fall under MAGI. Among those that don’t are life insurance, non-qualified annuities, Roth IRAs and reverse mortgages.

Related: Think what you could do with half a million dollars in retirement

As an advisor I can, within one hour, increase someone’s disposable income by potentially several hundred thousand dollars by using an appropriate product mix to put them in a lower income bracket. This will be very critical for advisors going forward.

Hersch: Are many advisors not cognizant of how tax benefits may be leveraged to cover rising healthcare costs?

Mastrogiovanni: Yes. Medicare Parts B and D are directly related to MAGI income. By purchase, say, life insurance with a long-term care rider, you can lower your healthcare costs, and increase your disposable income, in retirement.

Built into an income replacement ratio — a person’s gross income after retirement, divided by his or her gross income before retirement — is healthcare costs, albeit not all. The upshot is that an individual or couple leveraging the tax benefits of life insurance and annuities may only need to save, say, $30,000, as opposed to potentially hundreds of thousands of dollars needed absent these benefits. The savings needed is not necessarily as big a number as you might think.

What we know from industry research is this: People are very willing to take action to address healthcare costs. Almost a year ago, one 401(k) record-keeper issued a press release claiming that if a plan participant went onto their website and clicked on healthcare, the average contribution rate increased 25 percent.

That increase took place without the encouragement of an advisor. Now imagine if an advisor had been helping this individual? That increase might be significantly more.

Advisors today are looking to increase “wallet share.” Helping boomers better manage healthcare costs in retirement is a very effective way to do this.

Related: These 5 charts predict what retirees will pay for health care over the next 10 years

See the charts and accompanying text beginning on the next page for highlights from the HealthView Services report (click on charts to enlarge):

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