Ed Gjertsen II, CFP
Vice president, Mack Investment Securities
“Being able to quantify medical expenses is difficult, if not impossible. The challenge comes from the dispersion of client health experiences — dying suddenly in one’s sleep or being sequestered to an LTC facility in lockdown as dementia causes them to wander … The best defense against medical expenses for those over 65 is to make sure the Medicare Supplement plan they choose may provide appropriate coverage versus the cost.” Leading up to Medicare eligibility age, Gjertsen discusses “what if” scenarios with clients and runs financial planning scenarios through MoneyGuidePro to help with medical expense planning.
Carolyn McClanahan, M.D., CFP
Director of financial planning, Life Planning Partners; co-founder, Whealthcare Planning
“We don’t do long-term health care projections because health care inflation and the way we pay for health care will have to change. If health care continues to inflate as it has been over the last 30 years, it will consume over 50% of GDP in the next 25 years — this is not sustainable and something will have to give.” In the meantime, McClanahan uses a “normal” inflation rate to budget for annual health care expenses. Contrary to conventional wisdom, McClanahan says that less healthy retirees will spend less on health care costs over their lifetimes because they’re likely to not live as long, but she budgets different numbers for “high health care users” and “low health care users.”
Carol Fabbri, CFP
Founder, Fair Advisors Institute
“Not enough emphasis is put on the impact of increased Medicare premiums due to higher incomes. Clients who have saved in their IRAs and 401(k)s and have to take minimum distributions can find themselves bumped into higher cost bands for Medicare because of this increased income.” Fabbri also noted that “costs for long-term care, whether at home (less expensive) or in a facility (more expensive) can more than double the expected lifetime health care costs.”
Amy Shepard, CFP
Financial planner, Sensible Money
“We believe it’s nearly impossible to plan for health care expenses in retirement without looking at the entire financial picture for each client.” Shepard looks at how all income sources — investments, pensions, Social Security and so on — will affect clients’ financial plans and makes recommendations on such things as annuities and Social Security and pension claiming strategies. The idea is to match assets (investments) to liabilities (cash flow needs). She uses a 5% annual inflation rate to cover health care expenses throughout the financial plan and typically budgets for each client $3,600 on average for supplemental plans, plus Part B premiums based on a client’s expected income each year, plus $5,000 for out-of-pocket expenses in today’s dollars, factoring in retirement medical coverage if they have it.
Georgia Bruggeman, CFP
Co-founder, Meridian Financial Advisors
Bruggeman uses a 2% annual inflation rate for medical expenses but adjusts higher if needed and budgets $6,000 per person to account for annual medical expenses. “We know what Medicare Part B will cost in the initial years based on tax return data from two years prior [and] what a Medicare Supplement plan will cost and what Part D drug plan ranges are… We report costs monthly because that is how clients actually pay for them.”
Tracy Sherwood, CFP
Senior financial advisor, Clarence, New York
"Most clients realize that [health care] is a significant cost that they have to plan for in retirement. While higher costs may stress their plan, many prefer to go with higher figures to ensure they are budgeting enough." Sherwood uses a 7% annual inflation rate for clients' health care expenses in retirement and presents the amount they need to budget for on a monthly and annual basis, covering expenses through monthly cash flow from Social Security and pensions or drawn from investing savings. She also discusses projected costs for long-term care when clients are in their 80s along with various strategies, such as relocating to a retirement community, to cap the costs.
How much should retirees expect to spend on health care throughout the rest of their lives? Estimates vary, ranging from about $250,000 a couple to $500,000, depending on longevity, health status and location.
Some are even higher after including nursing home costs, but those costs will depend in part on a couple’s long-term care insurance — whether either or both members have it and exactly what their policies cover.
Other factors that impact retirees’ health care costs include Medicare Part B and Part D premiums, which tend to increase annually and vary based on income, medication costs and the costs, coverage and deductibles for Medicare Supplement or Medicare Advantage plans.
In 2019, couples with an annual income above $170,000 — and singles with income above $85,000 — are subject to surcharges added to their premiums for Medicare Parts B and D. Starting in 2020, however, those surcharges will be linked to inflation for the first time in 10 years, which could slow the number of retirees subject to the surcharges.
(Related: Medicare Surcharge Changes: What Advisors Should Know)
But even those retirees, like most others, will have to contend with rising health care costs unless major policy changes are enacted.
Between 1960 and 2017, spending on health care in the U.S. exploded from 5% of GDP to 18%, according to the Centers for Medicare and Medicaid Services, and there’s no letup in sight. Annual spending is expected to increase an average 7.4% over the following 10 years, according to CMS.
With these dramatic cost increases in mind, ThinkAdvisor asked financial advisors how they budget for clients’ health care costs in retirement, what factors and variables they include in their estimates and what recommendations they present to clients to cover those costs. The respondents to our query were all CFPs and one is also a medical doctor.
Check out the slideshow above to see how advisors plan for clients’ health care costs in retirement. Please note we did not include all the comments received from each advisor due to space constraints and we have instead highlighted comments that, when combined, provide the range of issues advisors address and the solutions they provide.
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