When it comes to difficult conversations for advisors, client health ranks alongside mortality as one of the most personal and uncomfortable topics to broach. But as with most things in life, the difficult conversations are often the most important and rewarding.
The industry tends to talk in general terms about the need for clients to plan for living to 95 or even 100 and save or spend accordingly.
To put it plainly, the 50% of the U.S. population with chronic conditions will in general not live as long as healthy individuals and will spend more each year to cover health care expenses when working and in retirement. That said, healthy retirees will, on average, require significantly more savings to cover health care expenses because of their longer lifespans. These costs should not be dismissed as an insignificant line-item in the planning process. They are projected to account for as much as a third of future retirement budgets.
Although it has significant implications for retirement planning, health often isn’t factored into these discussions.
One argument we hear against focusing on a client’s health during the planning process is that life expectancy is unpredictable. This is ironic because in financial services we use historical market data to forecast future performance. Advisors plan on equities rising annually at around 7% to 8% after expenses over the long-term, although we know this can vary considerably over the short-term.
The same principle applies to life expectancy. Current actuarial data projects that a healthy 45-year-old male will live to an average age of 87. He may not live as long or he may live longer, but that doesn’t mean he shouldn’t plan for his average longevity.
Health care costs are also predictable over time — even if individual medical events are not. Individual expenses, including premiums and out-of-pocket costs, have historically risen faster than the U.S. inflation rate, growing on average between 5% and 6% each year. Actuarial forecasts project health care inflation will continue on this path into the future.
If we can agree that longevity and future medical expenses are important to retirement planning, we need to factor in health and chronic conditions.
The numbers tell the story.
Actuarial life expectancy for a woman with type 2 diabetes is approximately 10 years less than her healthy counterpart. A 45-year-old male with high blood pressure, who is 50 pounds overweight, will live five fewer years than a person without these conditions.
A 65-year-old male with type 2 diabetes can expect to live to age 78 and will need to have saved $73,000 at retirement to cover $141,000 in lifetime Medicare premiums and out-of-pocket costs, based on a 6% rate of return.
Comparatively, a healthy man of the same age will likely live to 87 and need $105,000 at retirement to cover $285,000 in projected lifetime healthcare costs. If he lives to 95, he would need $144,000 at age 65 to cover over $518,000 in future medical expenses.
Although the retiree with type 2 diabetes will pay more annually out-of-pocket, the healthy person’s lifetime costs will be $144,000 higher, and he will require an additional $32,000 in savings at age 65 to cover costs throughout retirement.
It’s important to recognize that certain chronic health conditions can be managed and improved. As a matter of fact, the one factor that has the greatest impact on health care costs and longevity is individual behavior. Consequently, individuals who take simple steps to better manage their condition can potentially increase their life expectancy and reduce out-of-pocket healthcare costs by thousands of dollars a year today and in retirement.
We can now actuarially calculate the financial and longevity benefits of healthier behaviors. This data adds a new dimension to advisor-client discussions around health and wealth. By outlining how better health can reduce annual medical expenses and the benefits of investing these savings to address future needs, advisors can show clients an additional path to a longer and more financially stable retirement.
Clearly, health matters. If health is not discussed with clients in the retirement planning process, advisors may be missing a powerful opportunity to engage around an issue that is both top-of-mind and financially important.
To put this in context, if a 45-year-old with high blood pressure takes steps to manage his condition and works with an advisor to invest the average out-of-pocket annual savings, he could increase his life expectancy by several years and accumulate approximately $100,000 in additional retirement savings by age 65. This means more disposable income in retirement, and, of course, that his advisor will have increased assets under management in the process.
Now that’s a much easier conversation to have.
Ron Mastrogiovanni is the chief executive officer of HealthView Services, a Danvers-based health care data company, and of HealthyCapital, a health care data joint venture with Mercy Health. HealthyCapital recently issued a white paper giving details about the health care costs related to chronic conditions.