Fast-rising health care costs are a growing concern for retirees. As noted in this space on June 10, a report from HealthView Services, a producer of health care cost projection software, pegged health care costs for a 65-year-old couple retiring today at $288,000 — no small chunk of change.
HealthView Services Founder and CEO Ron Mastrogiovanni turns in this installment to two other factors that advisors must incorporate into their retirement planning for clients: (1) the disproportionate impact of long-term care costs on a surviving spouse; and (2) the Department of Labor’s new fiduciary rule.
Related: Long-Term Care News & Trends
If advisors are to meet the DOL rule’s best interest standard, asserts Mastrogiovanni, then estimates of health care and long-term care costs in retirement — as well as tax-advantaged insurance products needed to minimize those costs and taxable income — will need to become part and parcel of a retirement income plan. The following are interview excerpts.
LHP: Based on your research, what are the implications of rising health care costs for women? How does this impact compare with that for men?
Mastrogiovanni: I put together a case study involving a couple: a 60-year-old man expected to live to age 87; and a 58-year-old women with a life expectancy of age 89. Their health care costs thus must account for a two-year difference in age, and an additional two years of longevity.
For the wife, that means she will be responsible for $104,000 more in health care expenses than her husband over the 4 years.
Additionally, the couple will require long-term care, which varies in cost by state. Assuming an industry average of 1.5 years of care, he will be responsible for an additional $181,000 in LTC expenses in New York State or $71,000 in Texas.
His wife will need on average 2.5 years of long-term care, yielding a price tag of $302,000 or an additional $121,000 in New York compared to her husband; in Texas the difference in cost between husband and wife would be $47,000. These figures are a big shock that people need to address in retirement.
LHP: Another potential shock in retirement for a surviving spouse, I understand, is the tax bill. Can you talk about that?
Mastrogiovanni: Yes. Assuming the wife receives income from three sources — her husband’s pension, Social Security and required minimum distributions from an IRA — she could be pushed into a higher income tax bracket at her husband’s passing. Using industry averages, our case study pegs the additional cost at $50,000 in Medicare tax surcharges for the wife. So a surviving spouse ends up with additional expenses and financial pressures that, typically, a husband who predeceases her doesn’t have to address.
LHP: In respect to long-term care, could the cost of the couple in your case study be lowered by, say, using a home attendant in lieu of a nursing home?
Mastrogiovanni (pictured at right): Perhaps at the outset. Initially, someone may need a visiting nurse to stop by weekly and an aid twice weekly to handle basic chores, such as buying groceries or washing clothes. As time goes on, however, the need for these services increases; at a certain point, the retiree may decide a home attendant is necessary 3 days per week, 8 hours a day.
But if someone needs help for that length of time then, I’m sorry to say, he or she really need 24×7 care; 3×8 care is not realistic. And, in most cases, 24×7 home care is more expensive than a nursing home.
Also to factor in is the cost of administering drugs. If my parents were in a nursing home, Medicare would cover certain medications. That’s not the case if the drugs were administered at home. So there are disadvantages for people receiving home care.
Retirees might favor, alternatively, an assisted living facility, such as a condo, an option generally only available to more affluent people who don’t require 24×7 care. But these people still have to maintain their home, have the grass cut and pay property taxes. You have to add in these additional expenses when comparing assisted living facilities to other end-of-life options.
LHP: Understood. Let’s turn to the Department of Labor’s new fiduciary rule. What are the rule’s implications for agents and advisors endeavoring to develop a retirement income plan as it relates health care and long-term care costs?
Mastrogiovanni: Health care, housing, transportation, food and discretionary expenses are not mentioned in the 1,000-plus pages of the DOL’s conflict-of-interest regulations. The rule is very general.
What’s clear is this: To act in the best interests of the client — a key requirement of the rule — you have to go through a thorough planning process. Historically, retirement planning hasn’t focused much on health care costs.