Retirees will need to amass small fortunes to pay for their health care, we are told. The lifetime forecasts typically range from $150,000 to $400,000. But what do these figures really mean in a planning context?
After all, your clients’ mileage will vary greatly depending on health, longevity and a variety of other factors. The Employee Benefit Research Institute (EBRI) says men retiring in 2020 can expect to spend a median of $109,000 on health care; for women, the corresponding median figure is $156,000. But EBRI’s 90th percentile forecasts are far higher: $313,000 for men, and $357,000 for women.
And these figures exclude long-term care. The estimates do include the out-of-pocket expenses that Medicare doesn’t cover, typically premiums for Medicare Part B (outpatient services), Medicare Part D (prescription drugs) and a Medigap supplemental policy, co-pays plus dental and optical care.
Your clients probably don’t fully understand the risks. A recent study published in the American Journal of Law and Medicine finds that most Americans underestimate what they’ll spend on health care by a wide margin. The researchers asked over 1,000 Americans, age 40 to 80, what they expect to spend on healthcare in retirement; the median estimate from women for 2020 was $30,000, and men said they expected to spend $60,000.
“Healthcare typically accounts for 15 percent to 30 percent of discretionary expenses in retirement, but it’s the one thing people know the least about,” says Ed Murphy, head of defined contribution at Putnam Investments. Putnam offers a health care cost estimator as part of its online Lifetime Income Analysis tool, which is made available to workplace retirement plans served by the company.
Putnam partnered on the healthcare cost estimator with HealthView Services, a small Massachusetts company that has developed a very useful set of online tools for gauging healthcare costs. HealthView is marketing its software to financial advisors.
HealthView projects likely healthcare costs for specific individuals by taking into account the key variables:
· Longevity. Current age, expected year of retirement and gender all are factors that can help predict the total number of years of healthcare that must be funded.
· Health. A retiree in excellent health likely will live longer, which actually drives up lifetime expense. A retiree with major health problems may consume health care services more intensively, but much of that will be covered under Medicare - and he may not live as long.
· Location. Although Medicare B and D premiums don't vary nationally, Medigap supplemental premiums are set and regulated at the state level and vary substantially.
· Income in retirement. High-income seniors pay stiff Part B and Part D premium surcharges. The surcharges affect single filers with more than $85,000 in annual income and joint tax filers with income over $170,000. Currently, the high-income surcharges affect just five percent of seniors, but that is on track to hit 14 percent by 2019 under the Affordable Care Act.
The surcharges are substantial. This year, filers with income over those amounts pay 146.90 per month just for Medicare Part B - $42 more than the basic premium. Surcharges also apply to Part D, and they run up through a series of higher income brackets; at the highest end, the Part B premium is $335.70, or $230.80 per month higher than the basic premium.
I ran some hypothetical scenarios using HealthView’s software to illustrate how much health care expenses in retirement can vary (see charts). For example, expenses for a 55-year-old man can vary greatly, depending on health and location. A diabetic man with high cholesterol living in Hawaii (life expectancy from age 65: 12 years) would spend just $123,000, compared with $457,000 if the same guy is in excellent health and lives in New Jersey (life expectancy: 24 years). Meanwhile, a healthy 55-year-old woman living in Hawaii (life expectancy: 26 years) can expect to spend $399,000 in retirement, compared with $488,000 in Minnesota. And so on.
The numbers sound daunting, but I’m expressing them in future dollars. That brings us to one of the biggest unknowns in health care planning: future increases in medical costs. HealthView’s software assumes that health care prices will rise in a straight line by about seven percent per year; you may think that’s too high or low - depending on your optimism (or pessimism) about the future of the U.S. healthcare system. Lately, costs have been moderating: Medicare per-beneficiary spending rose only 0.4 percent in fiscal 2012, and overall Medicare spending was up just 3 percent, according to the Congressional Budget Office.
And the projections look more manageable expressed in today’s dollars. For example, our excellent-health female New Jersey will need $244,000 at age 55 allocated to health care. Our poor-health male in New Jersey would need about $99,000 set aside.
Most advisors can identify ways to plan against numbers like that, argues Ron Mastrogiovanni, CEO of HealthView Services. He points to strategies such as maximizing Social Security income through delayed filing, or tapping home equity and setting aside a portion of the proceeds now as conservatively-invested lump sum.
“Even though numbers are large, there’s so much we can do about it,” he says.
Mark Miller is a journalist and author who writes about trends in retirement and aging. He is a columnist for Reuters and also contributes to Morningstar and the AARP Magazine. Mark is the author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living(John Wiley & Sons, 2010). He edits RetirementRevised.com. Twitter: @retirerevised