There are many retirement issues that advisors and their firms need to consider in order to be in compliance with the Department of Labor fiduciary rule, including health care costs. But like almost anything having to do with health care and insurance – both private and public – it’s complicated.
For example, the premiums that retirees pay for Medicare Part B, which covers doctor visits, lab tests and medically necessary supplies, and for Medicare Part D, which covers prescription drugs, are based on income, unlike Medicare Part A, which is free.
Married couples with a modified adjusted gross income above $170,000 will pay a higher premium than their counterparts whose MAGI is below that threshold, and the Medicare premium increases above each of these higher thresholds: $214,000, $320,000 and $428,000.
Financial advisors can help their wealthier clients avoid some of these higher Medicare costs by including in the mix of investment assets products that the government doesn’t consider income when calculating Medicare premiums.
For example, while IRA distributions, pension payments and ordinary dividends and capital gains are included in MAGI, distributions from a Roth IRA, Roth 401(k), reverse mortgages and health savings accounts are not.
“The product mix for investments … can make a real difference in how long retirement assets last,” says Ron Mastrogiovanni, president and CEO of HealthView Services, which provides health care cost projections for financial services firms.
“Advisors have to look at what’s the best product mix so that they optimize clients’ income in retirement. One option, among several, is to convert future IRA or 401(k) contributions to Roth IRA or Roth 401(k) contributions.
Mastrogiovanni calculates that a 45-year-old man earning $45,000 per year annually today, which increases to $119,400 before his full retirement age, will save $150,000 in Medicare surcharges if he converts his traditional 401(k) contributions to Roth 401(k) or HSA contributions. Avoiding those surcharges is equivalent to investing roughly a $100,000 lump sum growing at about 5% annually for 20 years, says Mastrogiovanni.
Health care costs are often the single biggest expense for retirees, accounting for as much as 33% of their spending, which is nearly equal to the 34% share for housing, food and transportation combined, says Mastrogiovanni. ”If advisors don’t take into account health care costs, which can be very substantial, they’re not acting in the best interest of their clients,” he said.
HealthView Services estimates that a healthy couple, both partners 65 years old today, will pay an estimated $288,000 for health care costs in retirement ($377,000 if dental, hearing, vision and all other out-of-pocket expenses are included). Fidelity estimates total costs at $245,000. In either case, these outlays are substantial, largely because Medicare does not pay for nursing home care. Long-term care insurance will help pay for some of these costs but not necessarily all of them, which is another factor that advisors need to consider. In addition, costs for women are often higher simply because they tend to live longer than men.
According to the Social Security Administration, the average life expectancy of a 65-year-old man today is 84.3 years, but it’s 86.6 years for a 65-year-old woman, and many more women and men are living even beyond those ages.
“When you’re planning for a couple, you need to take that into consideration,” says Mastrogiovanni. Not only will the wife tend to live longer than her husband, but she’s likely to spend more time in a nursing home because unlike her husband she won’t have a spouse around to help her navigate health issues and avoid moving to a nursing home, says Mastrogiovanni.
He calculates that as a result of those expectations, an affluent woman who is two years younger than her husband and lives two years longer than him will pay roughly $100,000 more in health care costs than her husband in future dollars, or just over $36,000 in present dollars.
The actual costs will depend on where the nursing home is located. New York State nursing homes, for example, cost 2.5 times more than Texas nursing homes and about 1.5 times more than California nursing homes, according to HealthView Services. Nationwide, the average nursing home costs $6,844 a month for a semi-private room, and the average home health aide costs $3,861 a month, according to Genworth, a long-term care insurer.
“Financial advisors need to take women into account” when calculating how much money they will need in retirement, including money to fund health care costs, says Mastrogiovanni. “They can’t just look at things generally.”
But for all their clients, “advisors have to start think about health care costs more than ever,” says Mastrogiovanni. “They’re liable under the DOL fiduciary rule.”
— Related on ThinkAdvisor:
- 5 Shocking Facts About Retirement Health Care Costs
- Top 15 Cheapest States for Long-Term Care: 2016
- Chronically Ill Clients May Have Lower Health Care Costs in Retirement
- Social Security Bill Would Raise Retirement Age, Slow COLAs