Multi-Gen Planning

Staying Whole & Healthy In Retirement

Six reasons to build healthcare costs into the process

by Ron Mastrogiovanni

Ron Mastrogiovanni is CEO of HealthView Services. HealthView Services, a leading provider of retirement, healthcare, Social Security, long-term care applications, retirement planning and decumulation tools to the financial services industry.

Over the last decade, retirement healthcare planning has become a recognized specialization in the financial planning industry. Here are six key reasons why accounting for healthcare in retirement plans needs to be a priority for all advisors – not just specialists.

Lifetime Retirement Healthcare Costs Are Significant

For clients who haven’t retired, the amount they pay for healthcare through their employer’s subsidized health plan seems modest. What’s a few hundred dollars a month when you are a reasonably high earner?

All too often, clients have a rude awakening when they reach retirement. Instead of only paying for 25% to 30% of the premium cost of their healthcare – because their employer was paying 70% to 75% – they have to cover 100% of their premiums, plus all out-of-pocket costs. Medicare Part B premiums may seem comparable to what they were paying, but they only constitute around 22% of total retirement healthcare expenses (assuming Medicare Part D, supplemental insurance, and out-of-pocket costs are included).

Our actuarial data show a 65-year-old healthy couple retiring this year will face projected annual healthcare expenses in their first year of retirement of $14,799. Over the course of their lifetimes (wife living to 90, husband to 88), they will pay a combined total of $776,197 in inflation adjusted dollars for all premiums and other health-related costs. That’s not including long-term care.

Healthcare Costs Will Increase Over Time

Although healthcare costs for relatively affluent retirees are unlikely to break the bank in the early stages of retirement, they will continue to increase at around 1.5 to 2 times the Consumer Price Index – driven by higher medical costs, age rating of supplemental insurance, and increased utilization of services as clients age. Drawing on government and economic data, along with 530 million medical cases to actuarially project future expenses, in 20 years at age 85 our average 65-year-old couple will face projected annual expenses of $44,657 or just over three times what they paid when they first retired.

The retirement healthcare expense decumulation curve shows that portfolios will have to generate significantly more cash flow over time to address healthcare needs. For most, the highest withdrawals will come at the time clients have drawn down most of their savings to help fund living costs. For the very wealthy, this will be far less of an issue than for the mass affluent. If not planned for, rising healthcare costs will squeeze budgets and force potentially hard choices later in retirement.

Savings Needed To Cover Healthcare Expenses At Retirement Are Not Out Of Reach

Assuming an average 6% annual return on a portfolio, a zero balance at actuarial longevity, and withdrawals that match the projected retirement healthcare expense decumulation curve, a 65-year-old couple retiring this year would need to have saved $256,502 at retirement to cover their projected future costs. As a result of healthcare cost inflation, a 55 year-old couple retiring in 10 years at 65 will need $383,771 to cover their projected future expenses.

It’s important to note that since Medicare Part B premiums will be deducted from Social Security payments, benefits checks will be lower than many expect. For our 65-year-old couple, year one Part B premiums will amount to $2,096 each ($4,192 total). Assuming average career earnings, this will account for around 12% of their first year Social Security benefits. Over their lifetimes, around $215,000 in Social Security benefits will go toward Medicare Part B premiums. This needs to be factored into the planning process.

Health Condition, Income & State Of Residence Will Significantly Impact Future Expenses

The most significant driver, by far, of retirement expenses and projected healthcare costs is longevity. With 50% of Americans having at least one chronic health condition that will impact how long they are projected to live, actuarial longevity needs to be factored into retirement plans for realistic discussions around how long savings will need to last.

By helping clients save enough when working, advisors can help ensure healthcare can be taken off the table as an issue in retirement...

For example, the average actuarial longevity for a 65-year-old male with type 2 diabetes is age 79 and his individual projected healthcare costs are expected to be $175,806, less than 50% of a healthy female (expected to live to age 90). A retirement healthcare plan that assumes longevity to age 95 for a client unlikely to live this long makes little sense, unless this is a specific choice the client makes to provide a “buffer” should he/she live longer than actuarial expectations.

It’s also important not to “set and forget” longevity expectations at retirement for either the healthy or those with chronic conditions, because clients’ health status will change. Incorporating projected actuarial longevity expectations into planning should be a dynamic process and used – as our tools do – to help clients understand the funding status of their portfolio against projected future expenses at any time during both the accumulation and decumulation phases of retirement.

Income also plays a key role in what clients will pay for healthcare. Clients with retirement income above $103,000 if single or $206,000 if married (imagine two full career teachers with pensions) should expect to pay at least 30% more on top of Medicare premiums in surcharges. Selling a property can also result in a significant bump in gross adjusted income that may trigger Medicare premium surcharges which are subject to a two-year look back.

Location also plays a significant role in determining total retirement healthcare expenses. Moving from a high healthcare cost state to a lower-cost state will decrease supplemental insurance (Medigap) and Medicare Part D premiums because they vary by geographic location. The cost of long-term care also varies considerably state-by-state.

Advisors Can Help

By helping clients save enough when working, advisors can help ensure healthcare can be taken off the table as an issue in retirement. Providing projected cost data for expenses and showing a client where their savings are relative to meeting this goal is a powerful motivator for retirement saving. Individuals are most likely to increase savings and investments to address future health expenses when cost projections are personalized. It’s also important to note that the data we provide reflects not only changes to Medicare and supplemental premiums, but also out-of-pocket costs including dental, vision and hearing expenses, as well as updates to actuarial longevity tables.

A basic level of understanding of Medicare, Income-Related Monthly Adjustment Amount (IRMAA) surcharges based on modified adjusted gross income (MAGI) are a foundational for advisors to be able to help clients make their savings go further and reduce healthcare-related costs.

Income sources that are fully or partially exempt from MAGI – like health savings accounts (HSAs), non-qualified annuities, and life insurance – should be a part of planning considerations for higher earning clients at risk of being subject to IRMAA. For HSAs specifically, maximizing contributions enables clients to reap tax benefits through contributions, investments, and withdrawals to cover qualified in-retirement healthcare expenses (including Medicare premiums) and may lower the base for IRMAA surcharges. Similarly, helping a client understand the impact on healthcare expenses of a move to another state, or sale of a property will, at a minimum, ensure they are aware of the financial consequences, potential costs and savings.

During decumulation, helping clients determine whether savings are on track to meet retirement needs, as well as efficiently manage sources of income, portfolios, and withdrawals to address rising healthcare expenses, are key to successful outcomes.

Advisors’ Interests And Client Interests Are Aligned

Ensuring retirement plans will address future healthcare needs is one of the top priorities of clients. Advisors with an understanding the complexities of healthcare planning, have a unique opportunity to add tangible value.

Advising clients on healthcare-related planning provides a powerful way to build businesses. Our experience shows clients are likely to invest more of their portfolios with advisors that bring healthcare advice to the table as part of the retirement planning mix.

The industry is in a very different place to where it was even just a decade ago. The data and tools that take into account the key variables in the planning process, and dynamically manage portfolios against healthcare and other needs, are available and increasingly sophisticated.

Not only is healthcare planning an opportunity, it is also increasingly table stakes for clients looking to ensure this fundamental need is met.


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