Health care costs are on the rise, and retirees are bearing the brunt of the burden.
According to Health View Services, a 65-year-old couple retiring in 2016 faces $260,600 in lifetime health care expenses. And that figure doesn’t even include the $130,000 for long term care insurance; retirees who purchase policies later in life will pay even more.
Even so, health care can be a tough topic to broach. For many advisors, the costs are unclear, the conversations uncomfortable and the specifics outside their areas of expertise.
“They want that annual review to be a really positive experience and don’t want to spend time talking about nursing homes and medical expenses,” said Quentara Costsa, CFP with Powwow, LLC.
Still, the complexity of health care presents a perfect opportunity to become a better resource and build stronger client relationships. It doesn’t have to be uncomfortable to talk about health care costs.
Here are a few tips for starting one of the most important discussions to help place your clients on secure, financially sound paths.
Begin at the end
“Most people focus on the first 10 years of retirement – the fun years,” says Costa. “Ask clients where their health will be in the last 10. If the advisor is willing to ask the question, most people are willing to open up.”
Some clients simply don’t understand the gravity of the situation. Uncertainty is worse than discomfort, though, and once they understand what’s at stake, most are eager to plan accordingly.
When it comes to clients’ existing knowledge, “assume a blank slate,” says George Guerrero, head of financial planning for True Link Financial. From group-based retirement coverage and long term care insurance to Medicare and Medicaid, don’t assume they’ve covered all of their bases. Ask.
Projections and simulations can also be useful, particularly for people on the fence about long term care coverage.
“Show them how they could literally lose everything,” says Josh Jalinski, president of Jalinski Financial Group. “Say the premium is $5,000 per year – is it worth it to spend $100,000 to protect the other $600,000?” It’s easy for clients to assume they won’t face the same fates as their peers, but once they understand how much is at stake, they may feel compelled to act.
As for the timeline, “the earlier the better,” says Guerrero. Clients are at their greatest earning potentials between 50 and 55 years old, they’re still healthy and they likely have another 10 to 15 years to plan and save.
“We’ll even talk about retirement at 45 or 35,” adds Jalinski. “We begin with the end in mind with every client, and if you get someone to buy a long term care rider when they’re 35, it might only cost them a couple hundred dollars per month.”
Learn your clients’ current plans
What plans do your clients already have in place? Depending on when they start working with you and what you’ve discussed, a couple may have goals, expectations and even savings they haven’t brought up – particularly if you only see them once or twice per year.
“[When they’re] around age 50, I start asking clients whether they’ve thought about their retirement living situations, transitional planning and long term care insurance,” says Costa. “Sometimes they know what I’m talking about, and sometimes they have no idea.”
Where will your clients live, and for how long? What roles will their children or other caretakers play? Have they considered what they’ll do if they live well past 80? These are the kinds of questions you need to ask up front to avoid oversights and set the stage for the rest of the conversation.
Past health and history
Many people think they only need to discuss diseases and risk factors with their physicians, but a solid retirement plan requires at least a general knowledge of a client’s health.
“It’s just like when you go to your doctor,” says Guerrero. “You take a view of your family history as it relates to medical conditions. Alzheimer’s, Parkinson’s, heart disease and the like – if those factors are in your history, you need to understand you might be on the right side of that bell curve.”
The same is true for smoking, obesity and even poor lab results. These factors aren’t death sentences by any means – and they may be improved by lifestyle interventions – but they will impact insurance premiums and the risk-to-benefit ratio of any given strategy.
Likewise, it’s critical to consider diabetes, high blood pressure and other chronic conditions from the get-go. According to the AARP, just under half of Americans ages 50 to 64 have at least one chronic condition, compared with nine out of 10 people 75 and older.
“The related costs are very large — on the order of $3,000 to $7,000 annually,” Guerrero adds. “Mortalities that people will inevitably face add up quickly, and the costs can be catastrophic to a person’s portfolio.”
Bottom line: Even if your clients are healthy before retirement, their health is likely to take a turn for the worse in the future. Purchasing policies and setting aside funds well in advance can significantly improve their quality of life in late retirement.
Learn the family dynamics
“Retirement is a family activity that everyone becomes a part of,” says Guerrero.
Plenty of people retire assuming their children will take care of them, but not everyone has considered the logistics. Is at least one of their kids working part-time — or not at all? Do their children have children of their own — and if so, will your clients be able to provide care for two generations at once? Has the family discussed expectations and responsibilities? Ask these questions early on — ideally in a meeting with all interested parties.
For some retirees, their family situation may also determine whether they age in place, move to a new home or relocate to an assisted living facility.
“There’s no sense living far away from your kids if they’re going to take care of you,” says Costa. “Early retirement is also a good time to transition, since it’s easier to make friends and establish yourself in your 60s than your 80s.”
Even for couples who won’t depend on family caretakers, it’s still important to bring kids into the conversation early on.
“Children ultimately become the decision-makers for their parents, whether their parents accept it or not,” says Costa. Particularly for clients who end up cognitively impaired, children may end up facing a host of decisions about assets and long term care. The earlier everyone clarifies their priorities, the more effectively your clients will be able to protect their assets and quality of life.
Ensure costs are covered
Once you’ve discussed clients’ health, family dynamics and goals, you’ll need to have a frank conversation about costs. A common rule of thumb for retirees is to plan for 80 percent of their preretirement expenses, “but I think it should be 100 to 120 percent,” says Costa. Most employees receive discounted health care packages, after all, while retirees are on the hook for Medicare, long term care insurance and a host of additional out-of-pocket costs.
Health care inflation is also driving rates up, and clients should understand that today’s premiums pale in comparison with predicted future out-of-pocket costs.
“People hem and haw about an LTC [long term care] premium, which may be $2,000 to $10,000 per year, but in inflationary dollars, it will cost far more to pay outright for long term care,” says Jalinski.
Likewise, Medicare Part B and D premiums are forecasted to rise 6 and 8 percent per year, respectively, for the next 10 years.
Overall, increasing longevity and the wave of baby boomer retirement are, together, driving the use of medical and long term care services to new heights. Costs are rising accordingly. As aggravating as LTC premiums and Medicare supplements may be to some clients, they need to understand that the out-of-pocket alternatives could be far worse 10 to 20 years down the road. That understanding, combined with an honest look at their health, will help guide their insurance and savings strategies in the long run.