By Ron Mastrogiovanni
InsuranceNewsNet Magazine, March 2012
A recent report from Credit Suisse estimates that health care eats up 33 percent of income for people 60 or older. Housing and food combined came in second at a distant 23 percent. This certainly supports surveys that consistently reveal overwhelming anxiety among retirees and pre-retires about rising health care expenses and the lack of financial planning focused on addressing this issue. It’s a legitimate concern.
About 78 million boomers will retire in the next 20 years, so the need is gargantuan for professional guidance on options that can cover out-of-pocket healthcare expenses. The good news is that excellent solutions already exist. It is simply a matter of educating advisors on how they can effectively use existing products to fund these rising health care costs in retirement.
What, exactly, is everyone waiting for?
Pre-retirees are distressed about skyrocketing healthcare costs because they have no idea how to quantify what these costs are for current retirees, let alone calculating how much they’ll need during their own retirement. The opportunity is ripe for innovative new approaches to solve the problem.
Today, a handful of firms are quantifying the problem by combining actuarial data with individualized variables—including age, gender, health condition, lifestyle and chosen retirement age—in order to calculate health-based life expectancy and total healthcare expenses. Once an advisor has a reasonable estimate of what these future healthcare costs could be, they can create concrete, focused financial plans within minutes that can provide clients with a stable income stream that withstands unforeseen medical costs throughout retirement.
Let’s examine a case study.
A financial advisor meets with John Q, a healthy 55-year-old that’s open to developing a plan to finance his retirement healthcare expenses. He expects to earn less than $85,000 per year in retirement and when he retires at age 65, will sign up for Medicare A, B, D, and Gap coverage. After using actuarial data to estimate costs from ages 65 to 88, the advisor emphasizes several important findings:
1) Healthcare expenses are expected to grow at around 7 percent or greater per year during John’s life.
2) Out-of-pocket healthcare costs will typically start at around $5,700 per year and will rise over time as inflation, premium increases, benefit reductions, and deteriorating health take effect.
3) By age 75, John will be responsible for approximately $12,500 per year in healthcare expenses, and more than $25,000 per year by age 85.
4) Based on actuarial data, John will likely be expected to spend about $370,000 for health care during his retirement.
By using this very specific data, the advisor can then tailor a savings plan to address John’s needs.
Talking to clients about saving for items like orthopedic shoes instead of luxuries like a vacation home isn’t glamorous. It doesn’t get people excited.
But consider an emerging philosophy: Those entering retirement can buy a less expensive car, downsize their home or take fewer vacations. They cannot “cut back” on the increased costs of health care as they get older.
Leisurely walks on island beaches and Mediterranean cruises are wonderful aspirations for retirement. However, if an advisor doesn’t guide pre-retirees to plan for how to pay for snowballing health-care costs, those nice trips will by necessity be replaced by trips to the park with the grandkids and exploring exotic locales on rented DVDs.
Boomers understand that downsizing health care is simply not an option. So what is the solution?
First, let’s establish that the goal of this type of savings program is not growth or accumulation, but safety. New Medicare subscribers will increase at an average of 10,000 per day for the next 20 years. This will translate into one of three scenarios: either Medicare premiums will rise or benefits will decrease, or both. Regardless, it is an inarguable fact that healthcare expenses are going to continue to escalate. So the question becomes: what is the best investment vehicle to use?
Annuities can be a viable health care funding option for boomers. Although annuities have their share of critics, many are very safe financial vehicles that can create a stable, predictable income, similar to a pension, throughout retirement.
From an advisor’s perspective, a narrow focus is often more appealing to clients, which ultimately leads to a shorter decision cycle and a larger investment. Of course, the choice of which type of annuity suits a particular investor is best left to the advisor. Options are available to satisfy all risk tolerances.
As shown in the chart above, if John invests $60,000 at age 55 in an annuity that guarantees a withdrawal rate of 4 percent, it should generate a bit over $400,000; enough to cover the total projected cost of health care throughout his retirement. Also, note that the excess amount withdrawn for the first 10 years can be re-invested in a variety of instruments including a safe, low-interest product, to grow along with the annuity.
In these uncertain and historically volatile times, when triple-digit swings in the market are becoming commonplace, annuities that can generate stable and predictable withdrawals may easily become an increasingly vital component of a successful baby boomer’s retirement investment strategy.
Ron Mastrogiovanni is CEO of HealthView Services, and co-founder of FundQuest. HealthView Services is a software firm specializing in financial planning, retirement planning, retirement income management, and health risk assessment tools and solutions. FundQuest is, a well-regarded provider of wealth management solutions for financial institutions, including banks, insurance companies and investment product firms, where Ron’s team managed more than $12 billion in assets. He can be reached at [email protected]