chalk talk | PLANADVISER August/September 2013

Facing Medical Costs

Should retirement plan advisers discuss health care costs?

By Steff C. Chalk | August/September 2013
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Dadu Shin

The retirement plan advisers of today face a dilemma. They find themselves at the corner of “Full Disclosure Drive” and “Self-Interest Avenue.” What has blurred the lines between full disclosure and questionable business practices? Since when has educating the client moved from the good-business-practice column to the possibly questionable one?

First of all, can full disclosure be used to blur the lines of self-interest? It most certainly can. Large expenditure items, such as hedging for 30 years in retirement or longer or the need for long-term care, must be at the forefront of any financial or retirement conversation. Any retirement planning or retirement readiness conversation needs to include the topic of health care. A retirement planning strategy today must incorporate a full-disclosure discussion around the needs associated with health care in 2014 and beyond.

We have grown up being inculcated to believe that we enjoy the most advanced medical care available on the planet. Up until now, we have flourished in a medical treatment “land of plenty,” where all you needed was a job, medical insurance or cash, for the best health care known to man to be at your fingertips.

We know that the consumption of health care services, and the corresponding expenses for any treatments, is back-end loaded for the average American. The overwhelming majority of health care expenses for most Americans will occur during the last six months of life. Anyone who has observed the slow death of an aged American—and who has also viewed the corresponding medical bills—is well aware that six-figure-expense days can repeatedly occur during the final month of a prolonged hospital stay.

Accepting the above as fact, since it occurs more times than not, some investment companies have sponsored research that incorporates the need to fund such expenses within an individual’s retirement savings calculation.

Should All Information Be Disclosed?

Does introducing the reality of health care consumption and the corresponding costs during the final years of one’s life need to be addressed in a retirement planning conversation? Or should those fees, the corresponding calculations and the funding of such future expenses be addressed in a completely different one?

Investment research from Putnam Investments has found that, under the new health care ­system, a married couple, at age 65, should anticipate spending $287,000 on health care during retirement. Since several studies have arrived at or close to that $287,000 as the anticipated lifetime estimate of out-of-pocket expenses for a married couple at age 65, that number has all of the attributes of consistency, if not accuracy.