Planning for Health Care in Retirement

Despite knowing they should save for retirement, people keep overlooking an equally important fact—however much or little they save now is going to get spent. One of the factors that can quickly eat away at retirement savings is health care. With estimates in the hundreds of thousands of dollars for health care expenses in retirement alone, the topic can no longer be overlooked.

Alison Cooke Mintzer, editor-in-chief of PLANADVISER spoke with John Carter, president and chief operating officer (COO) of Retirement Plans at Nationwide Financial and Kevin McGarry, director of the Nationwide Institute at Nationwide Financial, about the need for advisers to understand health care costs and how best to help their clients prepare for those costs in retirement.

PA: What are the impact/risk/implications of health care costs on retirement planning?

Carter: America faces a looming retirement crisis. With more than 60 million Baby Boomers reaching retirement by 2030, a lot of planning and education is needed.

Individuals who live to the age of 65 today have a 70% chance of needing some sort of long-term care during their lifetime. And not only are people facing the cost of health care, but they’re also witnessing their parents, relatives or friends needing some sort of long-term care. So they’re beginning to realize the costs associated with that, as well.

According to a Nationwide Financial survey, the majority of advisers (58%) say retirement plan participants want to talk about health care but haven’t necessarily planned for it in retirement, so there’s a big opportunity.

McGarry: Nationwide is committed to helping America prepare for and live in retirement. We know the impact of health care is a significant factor influencing whether that can be achieved, but many retirement plan advisers don’t have the tools and resources they need to address plan sponsors’ and participants’ concerns about the subject.

We learned through our survey that 49% of advisers believe they could be held liable for not preparing clients to meet health care costs in retirement. So, we need to help plan participants understand what health care expenses they could be facing and then assist them in making a plan to help prepare for those costs.

PA: Kevin, have you found that retirement plan advisers who also have expertise in health care planning are becoming more and more in demand?

McGarry: Yes. Advisers who are knowledgeable about health care are actually building trust and credibility among their plan sponsor clients and their individual participants. This is invaluable, not only in retaining clients but also in attracting new ones. Health care is a very relevant conversation, and advisers today need to seek out partners who offer resources and tools that help eliminate the guesswork.

PA: So, what specifically do plan advisers need to know about health care?

McGarry: First, they need to understand the health benefits for the retirees of the plan sponsor. Currently, only 16% of companies with more than 500 employees offer health benefits to retirees. Given that, there is a huge need for participants to understand what their costs will be in retirement for health care.

Next, advisers need to know how to educate plan sponsors on the cost of retirement and the cost of health care. Then, they need to help participants put a plan together to save the appropriate amount to generate retirement income that accounts for the cost of health care. That may mean helping a participant increase his deferral rate from, say, 4% to 6% or 7%.

Carter: Advisers first need to understand which health care costs will impact retirement plans and retirement goals. To do that, they can:

• Use Nationwide Financial’s interactive retirement planner to help participants understand what they need for retirement;
• Visit nationwidefinancial.com/healthcare to get information on health care costs in retirement; and
• Reach out to their Nationwide Financial retirement plan wholesaler.

Even when you look at Medicare and some of the supplemental programs available, there are many misconceptions and, I think, frankly, a great deal of confusion.

Many employees are unaware that, while Social Security can be collected as early as 62, Medicare eligibility doesn’t start until they reach 65. Those planning to retire earlier than 65 should have a plan ready for replacing employer-provided health insurance.

According to a study by the Employee Benefit Research Institute [EBRI], 28% of retirees are doubtful they can come up with $2,000 for an unexpected expense. Unfortunately, unexpected expenses in retirement are too often health-related. Having a healthy balance sheet is one way to be prepared for unavoidable out-of-pocket health care expenses.

Advisers need to point out the connection between deferral rates and out-of-pocket health care expenses in retirement. That gives the adviser the context to address the benefit of potentially increasing deferrals so they adequately cover health care costs.

McGarry: As you look at advisers across the marketplace, too often they take a passive role in discussing health care with participants and plan sponsors.

We’ve found that more than half say they’ll start or try to have a conversation around health care. But if the client or participant seems reluctant to have that conversation, the adviser typically will switch topics. Only 4% of advisers insist on having a conversation about the cost of health care in retirement.

For example, advisers need to discuss retirement goals, starting with those that are critical versus those that are aspirational. That opens the door to include health care and long-term care in the dialogue and then how to begin that journey to start planning.

Some advisers even discuss health management and what individuals can do now to live a healthy retirement and lower these estimates. But you have to get past the topics that are paralyzing people right now and that cause many to do nothing.

Carter: The implementation of the Patient Protection and Affordable Care Act [ACA] provides a perfect opportunity to discuss with clients how they will pay for health care during retirement.

The cost of health care is justifiably one of the biggest retirement-planning concerns for Americans. That cost continues to grow, and the expenses associated with future medical issues are anything but predictable. In fact, the amount of money a 65-year-old couple will need to set aside to meet their projected out-of-pocket health care expenses through a 25-year retirement is $283,000, according to another EBRI study. 

PA: What do plan sponsors need to know about health care costs, and how can they approach this topic with participants?

McGarry: Sponsors need to have the health care dialogue with their retirement plan adviser, because, if participants don’t start planning now, they could face a crisis in retirement. There are some specific risks that individual investors face, preretirement, such as market volatility, as well as additional risks as they enter into retirement, such as inflation and longevity.

They should ask: What do you think the cost of health care is going to be in retirement, and how are you saving today to plan for those expenses? They should also have a discussion around Medicare for participants 55 and older. Ask them, “As you get closer to 65 and the opportunity to sign up for Medicare, what questions do you have around Medicare coverage?”

Another good idea is to have quarterly participant education meetings on the topic of: How much income do you need in retirement and what does that income actually cover?

PA: Why are health care costs sometimes even scarier for participants to address than retirement in general?

McGarry: Nationwide polled preretirees to learn what their thoughts were around retirement and health care costs. The No. 1 word they used was “terrified.” They are truly terrified of the cost of health care as they enter into retirement.

Correlated to that is their inability to estimate what the costs of care are going to be. Just about 80% of plan participants underestimate the cost of health care in retirement, and many advisers actually use client assumptions—not fact-based assessments—to build plans.

Nationwide Financial has created the Personalized Health Care Cost Assessment tool to help advisers work with their clients to estimate what their health care costs could be, based on family history, current health, income levels and the geographic location of where they plan to retire. The tool is designed to take someone from being terrified of health care costs to being confident he’s actually addressing the costs of his health care in retirement.

PA: How, specifically, can advisers use the Personalized Health Care Cost Assessment tool with plan sponsors and participants?

McGarry: The Personalized Health Care Cost Assessment tool is designed to help each participant understand what his estimated cost of health care will be in retirement. We partnered with one of the top actuarial firms in the world to price out the cost of premiums in retirement, along with out-of-pocket expenses. It’s all based on those basic variables: current health, the geographic location of where a person plans to retire, income levels and family history.

Carter: Plan sponsors are utilizing the tool among participants of all age groups to help them understand their estimated cost of health care in retirement—and, more important, what they need to put away today to be able to achieve that number tomorrow.

As an example, a person aged 50 might be saving 5% in his 401(k) plan, but he might need to defer to 7% or 8% to offset the cost of health care in retirement. The tool has resulted in participants increasing deferral rates and has encouraged them to participate in their retirement plan.

PA: How easy is it to use the Personalized Health Care Cost Assessment tool?

McGarry: It’s extremely easy. In fact, we need to ask only 12 simple questions to estimate an individual’s cost of health care in retirement. Things such as, do you have high blood pressure? High cholesterol? Where geographically do you plan on retiring? It’s very simple, very quick.

Carter: Advisers and plan sponsors can reach out to a Nationwide Financial regional retirement wholesaler for more information, as well.

PA: How can discussing health care costs help an adviser build business?

Carter: While health care is a subject that’s very challenging on many fronts, it also provides advisers the opportunity to improve a client relationship. When an adviser can effectively bring health care into the discussion, the discussion can also become multigenerational, where you’re not only talking to parents but to their children, which is so valuable when you consider client retention and succession planning.

Crafting a thoughtful, insightful discussion that will make plan sponsors confident that their participants can successfully estimate their health care costs in retirement is a great start. But it requires the adviser to build some competencies he may not currently have.

I think plan sponsor clients will increasingly seek out advisers who have this health care expertise. If the advisers don’t have these discussions or don’t dedicate themselves to learning about this, they probably will lose clients. Retirement plan sponsors are beginning to realize that, if retirement planning is done well, this significant benefit can be used as a nice recruiting and retention tool, too.

PA: Are there factors of health care planning that advisers should be coaching plan sponsors to integrate into their education?

McGarry: When an adviser can provide participants with a fact-based cost assessment based on their health risks and lifestyle, it gives him the framework to help participants build a plan from there.

There is also the issue of health care coverage in retirement. Fewer than 20% of firms offer postretirement health care plans to their retirees. Advisers can educate plan participants about these needs so they can plan more effectively.

Carter: I would add that many advisers are doing a great job of understanding and knowing the demographic trends among various participants. For example, on average, men have been in the work force longer than women, so they may be positioned for better benefits in relation to health care in retirement.

Typically, women have more of the care responsibility, as well, so their own health is, in many cases, sacrificed. They may be in a more stressful position, not only in terms of taking care of themselves and their family but also maybe their parents or other close relatives.

Then, as you move into long-term care, the majority of residents in nursing care facilities are women, and they are in those facilities longer than men. Advisers need to understand these dynamics and provide the appropriate education and tools to plan sponsors and their participants. 

PA: Do you offer any other health care solutions?

Carter: We also have a long-term care assessment tool and are working on additional tools, as well. For example, we just launched the “What’s Your Date?” interactive retirement planning website, in October. The site allows users to pinpoint their retirement date and then uses a fun, interactive and personalized planning process to educate them on what’s needed to adequately prepare for retirement, based on their desired lifestyle. The goal is to simplify the retirement planning process and increase employee confidence by helping them think through critical retirement planning questions.

McGarry: Our mission at the Nationwide Institute is to improve participants’ financial health and retirement outcomes. It starts by broaching these difficult conversations. Our long-term care program guides people to be more effective and more thoughtful around how they’re planning, whether it’s through a long-term care product, life insurance with a long-term care rider, or self-insurance. The tool lets people know what those costs will be, and it will help an individual forecast his probability and expense for long-term care.

One of the newer tools and resources Nationwide plans to launch in the next couple months addresses Social Security. The tool will help individuals understand how to maximize the benefit—whether they should take it at age 62 or at 70. It factors in people’s marital status and, if they are married, whether or not their spouse is close to the same age. The tool will help people plan effectively to maximize their Social Security benefits.

Carter: There isn’t one solution that fits all, and we see a lot of terrific planning that advisers do that incorporates current investments with other solutions to meet each individual’s current and future needs around retirement, health care and long-term care.