Chances are your clients' biggest retirement worry is a subject you know little about, and spend even less time addressing. According to a recent survey commissioned by Edward Jones, the number one fear adults have about retirement is “not being able to cover health care costs.” And if you think just having more money will make it less of a problem, you're wrong — in the study, high income earners were more than twice as likely to cite this concern as those in the lower brackets.
The general public's anxiety over this subject is well-reasoned, and their knowledge of both the problem and potential solutions is well ahead of that of most financial advisors. This month we'll tell you what your working clients need to do now to prepare for health care costs in retirement. Next month's column will cover moves your retired clients can make to mitigate medical expenses.
How much money will it take to cover health care expenses in retirement? Last year the Employee Benefit Research Institute estimated that a 55-year-old couple planning on retiring in 2016 would need $560,000 just to cover employment-based health insurance premiums, Medicare Part B premiums, and out-of-pocket costs associated with their health care.
But that figure rests on the assumption that they can even get access to health insurance at that time. And it doesn't include long-term care costs or insurance premiums. Nor does it include the cost of Medigap premiums, Medicare Part D premiums, or out-of-pocket prescription drug expenses. What's more, that figure requires that the couple cleverly die before they get too old — at 82 for the man, and 85 for the woman. An individual who retires at 65 in 2016, and then is “fortunate” enough to live to 100, should have a cool million set aside for all of her expected health care costs.
Of course, none of this is fun, and it might all end up being a meaningless exercise. Your clients might eventually die at 65 or 95 without requiring any major medical care. Or a client might incur costly healthcare procedures, which will either extend the now-poorer patient's life, or prove unable to prolong the patient's life and therefore be an unfortunate waste of money (although in the latter scenario one outcome is slightly preferable to the other, neither is particularly desirable).
Solution #1-Work Longer
Unpalatable as the numbers may be, they might be enough to convince would-be retirees to delay retirement by a few years. Especially when you point out the additional benefits of staying on the job a little longer.
Of course, working longer means your clients may spend a smaller portion of their lives “retired.” But the cost-benefits of getting subsidized healthcare coverage from an employer are great. If your clients are smart (or if you're smart enough to give them good counsel on the matter), they'll get any chronic ailments treated while they are still covered by their employer's insurance, instead of waiting until they are at the mercy of Medicare — or, worse yet, have to pay for everything out of their own pocket.
The extra salary they earn during their extended working years will also, obviously, boost retirement account balances, and give your clients the opportunity to save in vehicles that can be especially powerful in meeting healthcare costs incurred during retirement (see Solution #2).
And if it's any consolation to your clients, the Urban Institute found that if higher health care costs (and higher taxes to pay for higher health care costs) come to fruition as expected, a retiree in 2030 will have to work about 2.5 years longer to enjoy the same quality of retirement as someone who retired in 2002, all other variables being equal.
Solution #2-Save Smarter
Thanks to the Tax Relief and Health Care Act of 2006, an increasing number of your working clients have an option that can ease their tax and health care burden, both now and in retirement: a high-deductible health care plan paired with a Healthcare Savings Account.
So far supply is outstripping demand. According to a recent study by Watson Wyatt Worldwide, about 40 percent of employers either currently offer or plan to offer this choice to their workers. Yet Benefit News magazine estimates only 1 percent of employees are currently contributing to a Healthcare Savings Account.
The other 99 percent are missing out on some pretty great benefits-especially those who are concerned about paying medical bills in their Golden Years:
Lower premiums — Depending on your client's situation, premiums for a high-deductible plan could cost half as much as those of more traditional coverage.
Lower taxes — They also begin making pre-tax contributions to an interest-bearing HSA-money that may be augmented by the employer.
No taxes on withdrawals — Until the deductible limit is reached, the participant's share of any health care costs come out of the HSA-tax-free.
Money in HSAs can accumulate — Unused balances in the HSA roll over for use during future years.
An extra IRA in retirement — At age 65, unused balances can be withdrawn tax-free to pay for a wide range of qualified medical expenses or coverage, or be converted into a traditional IRA.
Based just on the prospect of lower premiums, your eligible clients may be best served by just contributing enough to an at-work retirement plan to get any employer match, then switching their funds to an HSA until they reach the maximum annual deposit limit (for 2007, it's $2,850 for single coverage and $5,650 for a family plan). Then any extra funds can go back into the 401(k).
Solution #3-Open a HELOC
One unconventional line of defense your pre-retiree clients can use to protect themselves against the ravages of costly health care emergencies is the home equity line of credit (HELOC). Why a HELOC, and why now?
If a pre- or post-retirement health care emergency occurs, and it isn't covered by public or private insurance, clients without a HELOC could be forced to take money out of retirement accounts, paying the corresponding taxes and penalties. Even more disastrous, truly exorbitant medical expenses could force a sale of the family home, or a declaration of bankruptcy.
But with a HELOC, your client can pay any uncovered costs by tapping the equity in his or her home at the stroke of a pen. Once the storm passes, he can arrange to pay off the HELOC with money obtained from other, longer-term sources. Even if he can't pay the loan off right away, until the line of credit comes due (usually five or ten years), he'll only owe interest on the amount borrowed — interest that may even be tax-deductible. And all of these benefits can usually be had for next to nothing in origination and annual maintenance fees.
It's better to set up a HELOC now, rather than make an attempt when the situation turns dire. If some day a client does need to tap home equity to pay health care expenses, it is likely that the condition that necessitated the medical work will render him temporarily or permanently unable to work. Even the loosest of financial institutions prefer to lend money to people with earned income.
And even if your client isn't in dire financial straits when he would otherwise apply for a HELOC, external economic conditions at the time may cause his favorite financial institution to tighten its proverbial purse strings, making a loan much harder come by.
Well, at least your working clients have some time to address how they'll pay for health care in retirement. Tune in again next month,, when I will tell you how you can help those who are already retired, or on the verge of retirement.
Writer's BIO Kevin McKinley is a CFP and vice president of investments at a regional brokerage and author of Make Your Kid a Millionaire — 11 Easy Ways Anyone Can Secure a Child's Financial Future. kevinmckinley.com
COUNTING ON UNCLE SAM OR THE BOSS MAN?
Better not. Employer health care coverage is in decline and Medicare is in dire straits.
When you confront your working clients about bearing a growing share of health care expenses in retirement, many will be sufficiently horrified to pay rapt attention. But some will chuckle dismissively, noting that between their employer's retiree health coverage and Medicare, they're not worried in the least, thankyouverymuch.
Here's hoping the confident are correct, but there is reason to think they're not. First, the long-hallowed employer health coverage that used to accompany every gold watch is on the way out. According to a Kaiser Family Foundation survey, in 1988, 66 percent of employers with more than 200 workers offered retiree healthcare coverage. By 2005, that number had dropped to just 35 percent.
And the idea that clients just have to make it to 65 to qualify for benevolent, all-encompassing Medicare coverage is tragically naive. In 2005, former Deputy Assistant Secretary for Economic Policy of the U.S. Treasury Kent Smetters said that we would need to shell out an additional $63 trillion or so to cover current and future Medicare obligations (that number, by the way, vastly exceeds the estimated total value of all wealth held by Americans).
Even if the program's financial future were on sound footing, there's a big gap between the care your clients will want and need, and what basic Medicare will cover. The Employee Benefit Research Institute says that for most retirees, Medicare covers about half of health care expenses. And that if a retiree were to purchase supplemental assistance plans like Medigap or Medicare Part D, EBRI says the extra cost per person could range from $151,000 to almost $800,000, depending on how long the retiree lives.