Study: Care Costs Will Swamp Retirement Plans

U.S. retirees have enough on their plates without worrying about yet another burgeoning financial challenge in retirement – having enough money to pay for skyrocketing health care costs.

According to a new study from HealthView Services, a medical industry software firm, “the average healthy 65-year-old couple retiring this year is projected to spend $288,400 in today's dollars on lifetime Medicare Parts B, D and supplemental insurance premiums.”

(The report data assumes average life expectancies of 87 for men and 89 for women.)

“When typical out-of-pocket costs for services not covered by Medicare, such as vision, dental and hearing are included, the couple's total retirement health care bill rises to $377,412 — $33,000 more than a similar age couple who retired last year,” the study reports.

The figures grow worse for younger Americans. According to HealthView, A 55-year-old couple can expect total health-care costs in retirement to total $466,000. A 45-year-old couple is staring down the barrel of $592,000 in total medical costs in their Golden Years.

Retirees shouldn’t expect Social Security to bail them out, especially younger Americans. Americans at 65 years old should expect health care costs to comprise 57 percent of their Social Security payments on an annual basis. Fifty-five-year-olds will, again, take a bigger hit, with 87 percent of their Social Security payments steered toward medical bills.

“Few Americans have taken steps toward addressing medical expenses in retirement and most do not understand Medicare costs,” said Ron Mastrogiovanni, founder and chief executive officer of HealthView Services. “But with the right mix of investment products, additional contributions to existing retirement plans or health savings accounts and an adequate time horizon, many Americans will be able to pay for their health care costs in retirement.”

Health Care Costs A Challenge For Advisors

For financial planners, those figures represent a major uphill climb for clients entering retirement. Yet some industry insiders don’t believe money managers are planning appropriately for those costs

“Many financial advisors fail to incorporate health-care costs in the plans they develop for their clients,” notes Daniel Milan, a managing partner of Cornerstone Financial Services. “The best step is to make sure to encompass a separate line item for anticipated future health care costs in the financial plan utilizing the appropriate cost inflation percentages.”

Milan pegs estimated health cost inflation at 5 to 7 percent when in comparison to Social Security, where cost inflation is only estimated at 2 percent. “Being sure to take this into account allows for proper preparation, managed expectations and inflation risk mitigation in the overall plan,” he says.

Matthew Essmann, also a managing partner at Cornerstone Financial, financial planner's need to take those statistics into account when attempting to accurately project the necessary retirement budget for America's middle class couple.

“There isn't much that can be done to cut medical expenses as they are going to be what they will be,” Essman says. “Therefore, the best tool is to plan appropriately well in advance with a financial advisor who incorporates health cost inflation risk appropriately.”

Essmann advises clients to purchase additional MediGap supplemental insurance coverage, which can alleviate many of the out of pocket expenses that Medicare doesn’t cover. “Also have some type of long-term-care insurance coverage for yourself and your spouse in order to pay for those even higher long-term-care costs are essential parts of the early planning process,” he adds. “The best tip is to plan early with a financial advisor who takes these health cost and inflation risks into account when developing the plan.”

Jim Adkins, the founder and CEO of Strategic Financial Associates in Bethesda, Md., says it’s no surprise that the cost of medical care in the US is on the rise.

“When planning for retirement, it’s necessary to factor medical bills into your projected expenses,” he explains. “Advisors need to have clients take a look at their medical history and try to estimate what such costs might be in retirement”

Factor In Long-Term Care Insurance

One of the biggest deterrents to a sound retirement is a long-term care event since this is an area that many still tend to overlook, Adkins says.

“The fact is that longevity is on the rise in America – people are both living longer and medical care is becoming more advanced,” he notes. “Hospitals have the ability to keep people alive for many more years, but this cost is going to come out of a retiree’s own pocket. Thus, It’s a good idea to look at a long-term care policy early because it’s based on age and medical history.”

Financial advisors need to be aggressive with their clients in building an action plan to battle soaring health care costs. If they don’t, clients won’t nearly have enough income in retirement, and by then, there won’t be much they can do to alleviate the problem.

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, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected].

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