Health Care Cash: How Much is Enough?

How much does a client need to save for out-of-pocket health care costs in retirement? It’s a question even the brainiest, actuarial propeller head will wrestle with. But with recent studies pointing to the comparatively poor health of retiring baby boomers, it’s probably more than you think.

How much does a client need to save for out-of-pocket health care costs in retirement? It’s a question even the brainiest, actuarial propeller head will wrestle with. But with recent studies pointing to the comparatively poor health of retiring baby boomers, it’s probably more than you think.

“It’s extremely important and just as confusing,” says Eric Park, the founder of Steamboat Financial Group, an LPL affiliate in Washington, Mo. “You can’t call yourself a comprehensive financial planner and not deal with health and long-term care planning—whether you provide the planning yourself or just discuss it with clients. If you’re doing that, you’re likely to become the client’s source for those funds in a malpractice suit.”

Only a year ago, the Census Bureau released a report that found Americans were suffering from substantially less disability and enjoying an improved quality of life. But there are tradeoffs for that good news: According to a recent study, despite less disability the general health of baby boomers is comparatively worse than their counterparts from previous generations—an ominous sign for an already cost-heavy health care system.

Titled Cross-Cohort Differences in Health on the Verge of Retirement, and released in December, the study finds that boomers “indicate they have relatively more difficulty with a range of everyday physical tasks, but they also report having more pain, more chronic conditions, more drinking and psychiatric problems” than their counterparts from 12 years ago. Examining the 51 to 56 year old set, the study finds they are in poorer health than the previous generation was at the same pre-retirement age.

“The trend portends poorly for the future health of boomers as they age and incur increasing costs associated with health care and medications,” says the report, which echoes the findings of previous studies. One of them, titled Are Baby Boomers Aging Better than their Predecessors? Trends in Overweight, Arthritis and Mobility Difficulty, found that between 50 percent and 60 percent of baby boomers were overweight when they were 34 to 44 years old, compared to only 38 percent to 42 percent of their counterparts born from 1926 to 1935 and 1935 to 1946. The study concludes that rising rates of obesity and diabetes may “reverse the progress towards reducing disability” and downtrends in cardiovascular-related deaths.

A report from The Commonwealth Fund found that over 60 percent of adults ages 50 to 64 who are working (or have a working spouse) have been diagnosed with at least one chronic health condition, such as arthritis, cancer, diabetes, heart disease, high cholesterol or high blood pressure.

What does all this mean for advisors and clients? More costs. (See Steve Gresham’s column, “Sticker Shock”, in the March issue of Registered Rep. for his take on this growing problem.) According to Fidelity Investments, the out-of-pocket health care cost to a retirement age couple for the next 15 to 20 years of life expectancy is now $200,000, a 5.3 percent increase from 2005. The National Coalition on Health Care puts the number between $200,000 and $300,000 just to pay for basic medical coverage.

But it could be a lot higher, says Park, who tells a story that should open the eyes of advisors and clients alike. A client of his, an 89-year-old farmer way out in bucolic Washington, suffered an aneurysm one day. He had to be rushed by helicopter to the hospital. Between the time he was picked up and the time he died—a 12-hour period—his hospital bill came to $140,000.

For a couple, Park guesses the number is probably going to be greater than $1 million. “With long-term care usually lasting between four and six years and monthly costs between $5,000 and $8,000 per month, depending on where you live, it’s cutting it awfully close at a million,” he says.

According to some actuarial experts, a 65-year-old man faces a 27 percent chance of needing long-term care, while a woman of the same age has a 32 percent chance. That’s a combined chance of more than 50 percent for one member of the couple to need long-term care. Even for those with seemingly enough assets to self-insure their long-term care, a policy can serve as “inheritance protection” and prevent parents from dipping into money they wish to pass to their heirs.

What should advisors being doing? For Park, it’s all about early education and awareness. He says his expertise is retirement planning in the context of financial planning, not insurance, so he only informs clients about the need for health and long-term care planning and asks that they use him as a source for guidance and discussion. He leaves setting up the plan to the propeller heads. “The card-carrying geeks who study actuarial tables for a living won’t project out further than a year when quoting your health care premium, so I’m not going to try to plan for a clients’ whole life,” he says. What are you going to do?

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