Rising health care costs plus declining retirement savings equals big challenges for financial professionals and clients.
The numbers just don’t add up for many Americans looking forward to their dream retirement.
The Economic Policy Institute estimated in 2017 the average American family has a mean retirement savings of $95,776. Half have no retirement savings at all.
Factor in the $275,000 Fidelity Benefits Consulting says the average 65-year-old couple who retired last year will need to cover medical expenses, and it’s obvious millions of retirees won’t have sufficient assets to maintain their desired lifestyle. The math looks even more daunting when you add in another number – 5.5 percent – the projected annual growth rate for health care expenses through 2026.1
Staggering medical bills are likely to catch many retirees by surprise. According to a recent study from Nationwide, four out of five retirees were unable to accurately estimate how much they could expect to pay for health care in retirement. Many also greatly overestimate how much Medicare will cover.
The growing divide between clients’ accumulated assets and the amount they will need to cover health care expenses while maintaining a long, comfortable retirement makes developing realistic financial plans much more challenging.
When it comes to planning for health care expenses, Harriet Chase of HKC Wealth Management in Belgrade, Montana, adheres to a simple philosophy,
“When it comes to retirement income planning, nothing should be unexpected.”
Chase shares the story of a long-time client, who died two years after being diagnosed with Alzheimer’s, as proof preparing financially for the worst-case scenario pays off.
“She never wanted her money spent on nursing home care,” Chase said. “Her goal was to leave her millions to her children.”
Although the client did not have long-term care insurance, she was able to live out her final days in assisted living rather than a costly specialized memory unit, which saved $4,000 a month. That savings, coupled with the financial plan Chase set up, allowed the client to leave her children a considerable financial legacy.
“I know she was happy. She was one of the lucky ones, being able to leave her money to her adult children and grandchildren. In addition to decades of financial planning, I made sure she had a will and trust, power of attorney and durable health care directives,” she said. “We did this prior to cognitive decline and brought in one of her adult children during the planning process.”
Research indicates Americans age 65 and older have a 70 percent chance of needing long-term care services.2 Without some form of long-term care coverage, moving into a nursing home could devastate their savings.
Many people think their only option to protect their assets from this potential scenario is to purchase an expensive long-term care policy. However, there are many alternatives available. Chase often recommends a more affordable option, a hybrid universal life policy with a catastrophic long-term care rider. Just like a standard life insurance policy, this type of policy pays benefits when a client dies, but it adds another measure of security: Should a doctor determine a client can’t perform at least two activities of daily living, it will pay a percentage of the death benefits to help defray care-related and other expenses.
“This is an especially rich benefit for the client if they have cash value from an old whole life policy that they can exchange,” Chase said. “It can be used for any expenses, not just for a skilled care facility or by a licensed care giver, it could be used to hire their grandson to mow the yard or to help with expenses needed to maintain a home. Or it could be used to hire someone to grocery shop for you and run your errands. That’s all out of pocket. Even if they have a long-term care policy, those types of expenses won’t be covered.”
Like Chase, Scott Sims, president and founder of The Pinnacle Group in West Chester, Ohio, recommends products that combine life insurance coverage and long-term care coverage.
Sims has also seen firsthand the importance of planning for health care expenses as early as possible.
He worked closely for five years with one married couple in their mid-50s to build a retirement plan. Both were looking forward to a long, fulfilling retirement after decades spent building successful careers. But unexpected health problems derailed those plans almost overnight
“He had a pretty devastating stroke,” Sims said. “One side of his body was completely paralyzed. Within six months of that, his wife was diagnosed with early-onset Alzheimer’s.”
Those life-changing medical issues forced Sims to substantially modify the couple’s original retirement plan. Thankfully, he had the right planning tools available and was able to make the changes needed to help protect their retirement assets.
“If you’re not using planning tools, you’re shooting in the dark,” Sims said. “You need to have good planning tools that can model alternate scenarios and allow you to react to a change of circumstances and see how that impacts things. In many cases it might indicate, at current spending patterns, a client is going to run out of money.”
Strategies for preparing for and responding to health care expenses vary from client to client depending on their assets, needs and retirement goals. Chase said she starts each client’s plan by determining how much monthly income they’ll need in retirement.
“Clients ask, ‘How much money do I need to save?’” she said. “That’s always the question, and it’s a good question. But I’m shifting my focus on how I answer by saying, ‘Let’s look at your financial plan and determine how much you need per month to live. Then let’s plan for those inevitable medical expenses.”
To ensure guaranteed income for life, Chase recommends a guaranteed-income product, such as an annuity. She also advises clients to balance pretax assets with after tax investments, such as a Roth IRA. Few of her clients qualify for a health savings plan, but she encourages anyone who does to create an HSA as a tax-free source of funds that can be used to help with health care expenses later in retirement.
“Clients will call and say, ‘I have a medical bill and I want to pay it off within 30 days. Which account should I take it out of?’” Chase said. “It’s a beautiful thing to have a Roth IRA or an after-tax liquid account to pull from. This helps the client preserve their pretax savings and avoid a potential tax increase. If they were to pull it out of their traditional IRA, they may actually need to take out $7,000 for a $5,000 medical bill just to cover the taxes.”
Whether it’s purchasing long-term care protection, setting up a combination of pretax and post-tax accounts or just educating clients on the need to save now for costly medical expenses they could encounter decades down the road, the key to success is showing clients the importance of starting early. But getting clients in their 20s or 30s who view themselves as “bulletproof” to prepare for health expenses they might encounter in their 70s or 80s presents a real challenge for financial professionals.
“Young people, as long as they’re healthy, don’t see the urgency,” Chase said. “That’s where our job as a good financial planner comes into play. They need to at least have a visual. When you take clients through the financial planning process and present them with their very own personalized plan, they will have a snapshot into their future. At that point, we can present solutions.”
1Yasmeen Abutaleb, “U.S. Healthcare Spending to Climb 5.3 Percent in 2018: Agency,” www.reuters.com/article/us-usa-healthcare-spending/u-s-healthcare-spending-to-climb-5-3-percent-in-2018-agency-idUSKCN1FY2ZD
2“What is the Probability You’ll Need Long-Term Care?” www.aaltci.org/long-term-care-insurance/learning-center/probability-long-term-care.php