What can you do to help clients meet retirement health care costs?
A great many of your clients are afraid of the same thing—not being able to meet their health care costs during retirement. How can you address this fear?
Your first step might be to realize the scope of this issue. Consider these findings from a recent RBC Wealth Management survey:
Clearly, with such uncertainty and trepidation, you’ve got a tremendous opportunity to encourage all your clients—and in particular, those who are getting closer to retirement—to incorporate health care expenses into their financial and investment planning.
You certainly don’t want to scare your clients about the cost of health care—as mentioned above, most of them are already somewhat nervous about it— but you may want to give them at least some idea of just what might lie ahead.
Specifically, the total projected lifetime health care premiums for a healthy 65-year-old couple is expected to be $485,246 in future dollars—and adding deductibles, co-pays, hearing, vision and dental costs increase this number to $607,662 in future dollars.1
And these figures don’t even include another ominous, potentially catastrophic expense: long-term care. Many of your clients will eventually need some type of long-term care, such as an extended nursing home stay or regular visits from home health care aides. Estimates of the percentage of people who will need long-term care vary, but, when discussing the topic with clients, you can point out that their real risk is either 0 percent (they’ll never need it) or 100 percent (they’ll need it.) And if they fall into the 100 percent risk category, they could face some daunting numbers. Consider this: The average annual cost for a private room in a nursing home is over $100,000.2 Furthermore, Medicare typically pays very little of these expenses.
To keep the “fear factor” in check when discussing health care and long-term care with your clients, let them know that by starting these conversations now, they are taking the first step toward addressing and mitigating concerns later in life.
How can you help clients successfully address the issue of health care costs during retirement? Consider the following:
When helping clients with their investment strategy, you’ll certainly want to consider those out-of-pocket health care costs cited above. Are your clients’ investments capable of achieving the growth needed to help them meet these health care costs? Will they have enough sources of income in retirement to cover their day-to-day living expenses, or might they be forced to dip into this income to pay for medical costs? You’ll want to address these and other questions when talking with your clients about health care expenses during retirement.
Encourage your clients to learn as much as they can about Medicare several months, or even a year, before they turn 65. You might want to give them at least a basic overview by informing them that, from the outset, they have two options: Original Medicare (Medicare Parts A and B) and Medicare Advantage (Medicare Part C). Original Medicare, which is administered by the government, covers hospital insurance (Part A) and medical insurance (Part B). Original Medicare has higher premiums, but allows more flexibility when selecting providers, has lower out-of-pocket costs and may be better for those managing chronic conditions. Medicare Advantage plans, which are administered by private companies, offer lower premiums but typically require individuals to use only the doctors, hospitals and other providers in the plan’s network.
Your higher-income clients may be subject to IRMAA (the Income-Related Monthly Adjusted Amount), which means they’ll face additional charges to the premiums for their Medicare Part B (medical insurance for doctor’s visits and other services) and Part D (prescription drug benefit). Clients’ IRMAA amounts can change over time—for example, if a client’s spouse passes away, but the client’s income doesn’t change substantially, the client, as a single tax filer, might actually have to pay higher IRMAA amounts. You may want to discuss this issue with your clients in the context of estate planning.
As mentioned above, long-term care costs can be enormous—enough to threaten your clients’ financial independence during their retirement years. To protect themselves from these expenses, clients essentially have two choices: they can self-insure by devoting a certain percentage of their portfolio to long-term care, or they can purchase some type of long-term care insurance. For most people, the “self-insure” option might drain away too many resources from their retirement savings, so you may want to discuss the benefits of purchasing long-term care insurance or a “hybrid” plan that combines life insurance with long-term care benefits.
As you know, a health savings account (HSA) offers several key benefits: earnings and interest are tax-deferred, withdrawals for qualified medical expenses are tax-free, and withdrawals are not mandatory at age 72, unlike traditional IRAs and 401(k) plans. You’ll want to mention these features to your clients and ask if their employers offer incentives in the form of direct payments to an HSA.
It’s obviously important for your clients to save and invest for health-care expenses—but they also need to protect themselves, and their families, in case of failing health or incapacity. Talk with your clients about developing a durable power of attorney, health care proxy, living will/health care directive and revocable living trust.
When you talk to your clients about health care expenses during retirement, be aware that men and women generally have different longevity and health care outcomes. For one thing, a women turning age 65 today can expect to live, on average, until age 86.7, compared to 84.3 years for a man reaching age 65, according to the Social Security Administration. Also, about 68 percent of nursing home residents and 72 percent of assisted living residents are women.3 And women are 80 percent more likely than men to be impoverished at age 65 and older.4 Consequently, when discussing issues such as saving for health care costs during retirement and the possible need for long-term care, you’ll want to point out to your female clients, whether married or single, that they may need to take extra measures to help ensure their financial security.
Some of your clients may already have a plan in place for coping with health care costs during retirement, but these plans may be incomplete. And other clients may have simply put off thinking about these costs, due to fear, unawareness of the nature of the problem, or simply reluctance to face the future. In any case, though, you’ll want to start a conversation sooner, rather than later. You may wish to schedule a meeting on this topic, or incorporate it into your next annual review meeting. You may even wish to include some of the information in this article in your client communications and newsletters. But however you choose to do it, be sure to stress the importance of taking action, because two things are clear: None of your clients are getting any younger, and all of them will face sizable health care expenses during their retirement years.
You can help them meet this challenge—so be proactive, persistent and positive. Your clients will appreciate the effort—and you’ll know you’ve done your best for them.
1 2017 Retirement Health Care Costs Data Report, Healthview Services2 Genworth 2020 Cost of Care Survey3 Long-Term Care Services in the United States: 2013 Overview, National Center for Health Statistics4 National Institute on Retirement Security