Helping clients prepare for one of their biggest retirement expenses

As a growing number of retirees face steep increases in healthcare costs, many financial professionals are helping them incorporate healthcare expenses into their retirement planning. Two financial professionals recently shared a few reasons why incorporating healthcare costs in retirement is becoming an important task for many advisors when serving their retiree clients.

The need for healthcare costs planning in retirement

Planning for healthcare costs is an essential part of retirement planning. For example, Danielle Lucht, owner and financial advisor at Everwell Financial and an 8-year Million Dollar Round Table member, cited Fidelity Investments’ July report that estimates a couple aged 65 retiring today will spend about $371,000 on healthcare and medical expenses in retirement.

“That breaks down to the equivalent of $1,237 per month if they live a minimum of 20 years in retirement,” she added. “This number includes Medicare parts B and D, deductibles, copays, coinsurance, doctor and hospital expenses, as well as prescription drugs.”

Lucht said that when she looks at a retiree’s budget, healthcare expenses end up being one of the top three to five expenses. Some retirees may even spend more on healthcare than they do on a mortgage or on taxes in retirement. “This is why clients need to understand how much it will cost and how they are going to pay for it,” she said.

Similar sentiments were echoed by Adam Rex, vice president of risk management at Cornerstone Financial Services and a 16-year MDRT member. He said that in his experience, the single largest financial outlay in retirement is related to healthcare expenses, even in cases without the need for extended care. Even simple healthcare expenses can be substantial, he added.

Preparing for healthcare expenses

To prepare for these expenses, Rex said that a client’s financial situation must be considered. If a client will not be subject to additional Income Related Monthly Adjustment Amount premium expenses or they expect that Medicare or even Medicaid will be a part of their planning, then adding additional expenses is not prudent. However, he said, clients who will have assets and income that will subject them to IRMAA should have a plan in place to pay for medical expenses in retirement.

In addition, healthcare costs have risen significantly faster than most other expenses.  “So,” Rex said, “it isn’t adequate to use a straight-line extrapolation of your expected healthcare costs. We encourage clients to look at the current healthcare expenses they would face if they were in retirement currently and then use a financial calculator to apply a more aggressive inflation factor to their planning.”

Products used to address healthcare expenses

Rex mentioned a few options to consider when conducting healthcare planning. For example, a health savings account is an effective tax-preferred savings tool.

“Clients should coordinate this planning with their health insurance plan and ensure they have adequate assets to pay for health expenses if they intend to accumulate money inside the HSA,” he said.

Lucht also mentioned the need for an HSA. She makes sure all her clients who have access to an HSA understand the importance of being able to set aside money that can be an income tax deduction, that grows tax free and can be taken out for healthcare-related purposes in retirement on a tax-free basis.

“My goal,” she said, “is to help them think of their HSA as a ‘retirement health savings account.’”

Lucht added that she wants her clients to treat their HSA like an individual retirement account or a 401(k) plan.  “If they don’t need to use the HSA during their working years, we model what the HSA could look like in retirement,” she said. In their retirement-income planning, it puts clients much more at ease if they have an account earmarked for healthcare expenses.

The need for an LTC plan

In addition, Lucht encourages her clients to have a long-term care plan, not just a product. And when it makes sense, Lucht recommends permanent life insurance with an LTC rider on it.

“I explain that it costs one dollar and you can use it in three different ways: The first way is through accessing the cash value if you need it, the second is through the long-term care benefit and lastly the death benefit,” she said.

Rex added that he encourages clients to plan for an extended health-care need.

“Remember that Medicare will help pay for acute healthcare expenses,” he said. “There is not an effective government solution if the need is not acute and is rather a custodial need. There are some Medicare benefits and Medicaid benefits, but we would not consider these adequate for our clientele.”

Rex gave the example of a retired client who breaks their leg. Medicare will pay for the cast and setting the bone. But if the break is severe and results in the loss of the leg, then Medicare will not pay someone to help the client with their activities of daily living.

“That is where a long-term care insurance solution may be appropriate,” he said. “We encourage everyone to think through this with their financial planner. It may not be appropriate to cover all these needs with insurance; supplemental or partial coverage may be adequate if they have substantial assets. It may be appropriate to cover potential needs for a shorter or longer period, depending on their financial situation.”

Why most people delay retirement

Lucht pointed out an important part of healthcare planning: the idea that most people are delaying retirement until age 65 because of the cost of health insurance.

“While most would love to retire before 65, the cost of individualized health coverage at anywhere between $800 to $1,200 a month stops a lot of people from exiting the workforce before they're eligible for Medicare,” she said.

And an issue that frustrates new retirees? Realizing that the cost of their Medicare premiums is based upon how much “earned income” they report in retirement, she added.

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