One of the most important planning activities a client can do with his or her investment advisor is factoring potential health care costs into retirement.
‘Data continues to emerge that provides clues to advisors and clients on just how much money they’ll need toward health care costs.
Exhibit A is a new report from RBC Wealth Management entitled “Taking Control of Health Care in Retirement.”
In RBC’s survey of more than 1,000 U.S. adults, 80 percent say they are “worried about health care as they age,” yet only 56 percent have actually factored health care into their retirement plan.
RBC offers some additional takeaways from its report:
Overall costs are being underestimated. Those surveyed anticipate relatively modest annual out-of-pocket health care spending in retirement. In reality, though, an average couple entering retirement at age 65 faces over $400,000 in future costs of care. The challenge is particularly stark for women, who face higher lifetime costs due to longer life expectancies.
The burden of paying for health care is falling increasingly on the individual. Not only have insurance premiums skyrocketed, but deductibles, copays and out-of-pocket costs are also on the rise. Experts estimate it is likely that health care expenditures will amount to 15 percent of an individual’s overall spending by the time they reach age 75.
Early planning is key. By taking a long-term view and being strategic about health care
coverage, benefits packages and savings plans, savers can avoid costly missteps and grow
assets for the future. Health Savings Accounts (HSAs), in particular, offer a unique, tax-free method to save and grow assets to fund the cost of care in the future.
Anticipating the unexpected is tough, but necessary. Maintaining independence remains a top priority among surveyed individuals. Unsettling as it may be to consider a long-term care event, it is increasingly a necessity for many Americans. Making proactive choices to address financial risks and potential incapacitation can save individuals and families potential hardships.
“Health care is one of the largest expenses we will face in retirement,” said Michael Armstrong, chief executive officer of RBC Wealth Management — U.S. “If not properly accounted for, these costs can derail even the most solid retirement plan.”
Calculating Health Care Costs
Advisors plugged into the health care issue say the challenges in getting the financial numbers correct are daunting, but the job is doable.
Fidelity did a study in 2002 that showed a retired couple, both age 65, spends about $160,000 on medical expenses in retirement, which does not include long-term care expenses, said Byron Ellis, a financial planner at United Capital Financial Life Management in The Woodlands, Texas.
“They did the same study in 2012 and that number had increased by 50 percent to $240,000,” he added. “That could add up to $16,000 per year if you live to 80 years old.”
Ellis has developed a three-point plan to covering health care costs in a client’s post-working years:
Plan for rising costs. When you create a financial plan, break out your health care expenses and separate them from your other needs, Ellis said.
“Doing so will enable you, or your adviser, to apply a different set of rules to these expenses,” he explained. “Break out your Medicare premiums and office visits. The more detailed you get, the better prepared you’ll be with health care costs.”
Build a health care bank account. If you are still many years away from retirement, consider signing up for a high-deductible medical plan and couple that with a health care savings account.
“An HSA may allow you to contribute tax-deductible dollars to the plan that can be withdrawn tax free for uninsured medical expenses down the road,” he said. “Most people add dollars to their plan and pull it out the same year. I suggest keeping the money in the account in order to build a cushion that you can draw from in retirement.”
Get a long-term care policy. While Ellis said he doesn’t think everyone needs a long-term care policy, he does believe that having a policy in place can make long-term care decisions easier.
“After all, having a policy in place can be like having a bucket of money set aside specifically to cover the need at a time that can be difficult and emotionally draining,” he said.
It’s also a good idea to get creative about saving for health care costs in a client’s golden years, other financial experts note.
“It’s helpful to think of annual health care expenses, as opposed to a lifetime cost estimate,” said Roger Young, senior financial planner at T. Rowe Price. “That way you can put it in the context of your budget and overall income sources, rather than trying to identify assets specifically for health care.”
Overall, it’s difficult to predict how much long-term care you’ll need.
“There is insurance available to manage this risk, but given the current state of that insurance market, we would be very cautious about purchasing a traditional long-term care policy,” Young said. “There are hybrid life insurance policies with LTC benefits that avoid some drawbacks of traditional coverage, but be aware that those don’t fully protect against the risk.”
Math-wise, estimate how much you will need per year to start saving for health care in retirement, then factor in some key considerations.
Allow for inflation, life expectancy, investment return and calculate the net present value, which is the amount of funding needed at a conservative discount rate, to fund projected health benefits, said Ilene Davis, licensed financial consultant based in Cocoa, Fla.
“While not guaranteed because the future cannot be predicted, at least it provides a sensible plan to calculate funding,” she said.
Brian O’Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC’s Guide to Creating Wealth. He’s a regular contributor to major media business platforms. Brian may be contacted at email@example.com.
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