Advisers Addressing Health Care Costs in Retirement

As many participants fall short on saving for retirement, it could stand to reason that advisers are refraining from addressing the high cost of health care in retirement, but advisers say they are, indeed, addressing this harsh reality with their clients.

“We talk about all aspects of what they will need in retirement,” says Michael Woomer, senior vice president of institutional and retirement plan services at Fort Pitt Capital Group. While a recent report from the National Association of Government Defined Contribution Administrators estimates that a 65-year-old couple retiring today should expect to spend $220,000 on health care over the course of a 20-year retirement, Woomer says the costs could range from $150,000 to $400,000.

“People basically understand that they will be facing health care costs, but they don’t understand how big the impact will be, so we tell participants how important it is to save as much as they can,” Woomer says.

It is far more important for retirement plan advisers to discuss health care costs in retirement than it is to talk about lifestyle goals, agrees Mary McDougall, a Merrill Lynch financial adviser in St. Paul, Minnesota. The premiums and out-of-pocket expenses that retirees face range from $10,000 to $20,000 a year, she says. “The expenses are a lot more than they expected,” McDougall says.

NEXT: Trend toward high deductible plans

Whether advisers want to address these costs or not, the trend toward high deductible health care plans paired with health savings accounts is bringing the subject of health care costs—pre- and post-retirement—to the fore, says Shelby George, vice president, advisor services, at Manning & Napier in Rochester, New York. Just like the movement from pensions to defined contribution plans, employers are moving toward high deductible health care plans that put more of the onus on participants, and employers “are encouraging advisers to talk about it more in their education materials.”

Advisers are also increasingly encouraging participants to invest in health savings accounts. “This is one area that participants can use to save above and beyond the retirement plan,” Woomer says.

Even for the investors with more than $5 million in liquid assets that Frank Migliazzo, managing director, private wealth advisors at Merrill Lynch in Troy, Michigan, advises, health care costs are a concern. Migliazzo notes that Merrill Lynch research has found that over the last 30 years, health care costs have risen an average of six percentage points above inflation each year.

Merrill Lynch has also found that many people will end up in a nursing home, he notes. For a 65-year-old, there is a 15% chance they will need to be placed in a nursing home. At age 85, that rises to 55%, and at age 90, it increases to 70%. Migliazzo’s clients are also worried about dementia. As a result, many are buying long-term-care insurance.

NEXT: In the client's best interest

“I would hope that advisers are not refraining from having this conversation,” says Scott Laue, a financial adviser with Savant Capital Management in Rockford, Illinois. “As a certified financial planner, we are required to disclose both the good and the bad,” Laue says. “We are finding that if we don’t address health care costs in retirement—particularly for those who want to retire early before Medicare kicks in—we are not doing them a favor. There may be some advisers who don’t think about bringing it up because they assume government programs will take care of everyone, but they don’t. We think it is an important consideration.”

In fact, the report from the National Association of Government Defined Contribution Administrators found that Medicare covers 62% of an individual’s health care costs, but the individual is responsible for the remaining 38%. Together with supplemental insurance averaging $2,232, individuals' total health care outlay each year is $3,937. For couples, it’s $7, 874. Deductible and co-pays are in addition to these costs.

In addition, the association says, citing data from the MetLife Mature Market Institute, many Americans will need long-term care, whether it’s home health care, which averages $98,280 a year; adult day care, which averages $81,900; assisted living, which costs $191,700; a nursing home semi-private room, which costs $202,575; or a nursing home private room, which comes in at $226,300. It is also important to consider that Medicare doesn’t cover long-term care, the association adds.