Few Participants Examine Retirement Health Care Costs

Nearly three-quarters (71%) of affluent pre-retirees have not determined their most sensible Medicare option.

This is according to a report just issued by Cogent Reports, based on a survey of 890 plan participants by Market Strategies International. All of the participants were age 55 or older and had at least $100,000 in investable assets. The survey also revealed 76% of pre-retirees haven’t evaluated or purchased long-term care insurance, and 53% haven’t estimated their longevity.

Conversations about health care in retirement are essential to ensure that people do not outlive their savings, according to Julia Johnston-Ketterer, a senior director at Cogent Reports. “Clearly, there is more the financial industry can do to help pre-retirees with their retirement planning needs,” Johnston-Ketterer says. “As more and more Baby Boomers approach retirement age, opportunity abounds for financial service providers who can successfully position themselves as a go-to resource—either for the investors themselves or for financial advisers who are challenged to provide retirement planning assistance with complex tasks outside of their traditional investment advisory role.”

Because health care costs in retirement are so high, the facts are a startling “wake-up call” for participants, Jerry Love, a CPA and personal financial specialist in Abilene, Texas, tells PLANADVISER.

“There is a common misconception that when they turn 65 and get on Medicare that it will cover all their costs and everything is fine,” Love says. “I educate them about the fact that they need a supplemental policy and need to consider prescription options.” Additionally, because Medicare doesn’t pay for a nursing home, they will need long-term care insurance, he adds.

“Death and a lingering passing isn’t something they want to talk about,” he says, but the fact of the matter is that nearly half of those who reach the age of 65 will spend some time in a nursing home, for an average of two to four years at a cost of $200,000 to $300,000 beyond what Medicare will pay for. Even if someone has succeeded in saving $500,000 to $700,000 for retirement, one-third or half of that will need to be spent on medical costs, Love says.

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To broach the subject, Love meets with participants in one-on-one meetings, shows them life expectancy actuarial tables and asks them about their family’s medical history and immediate relatives’ causes of death. The tables show that a 65-year-old man today may live until age 81 or 82, and a 65-year-old woman could see 84 or 86.

“We have found that health care costs are often front and center within the news, but longevity is an afterthought,” Dan Dingus, president and chief operating officer at Fragasso Financial Advisors in Pittsburgh, tells PLANADVISER. “We often try to make it more personable by asking how many have relatives or friends in their 80s or 90s. Pretty quickly they begin to realize they may need their retirement to last another 30 years for at least one spouse. Income planning for a person’s potential life span is key.”

 

 

Love also educates the participants he serves about the cost of an average private and semi-private room in a nursing home. In Texas, private rooms average $60,000 a year, and semi-private rooms $40,000, but in New York, that jumps to $126,000 for private nursing home rooms and $60,000 for a semi-private room.

This paves the way for Love to then discuss long-term care insurance. “Most people are not interested in long-term care insurance until you put it before them,” he says. “We all think [major illness] is something that is going to happen to somebody else.” He recommends that people buy long-term care insurance in their 50s, when they can get lower premiums and better coverage than if they were to wait until they are older.

Of course, says Mackey McNeill, a CPA personal financial specialist in Bellevue, Kentucky, “it is hard to convince a healthy 50-something-year-old they will need long-term care insurance.” One way she tries to drive the necessity home is by running a Monte Carlo analysis that shows the likelihood a participant will be on track for a successful retirement. McNeill first runs the simulation without adding in health care costs. When retirement health care costs are factored in, an individual with an 80% likelihood of success could see that plummet to 25%, she tells PLANADVISER.

Those statistics can be convincing, she says. Then, to drive the point home even further, McNeill meets with participants in person every six months to go over their portfolio and to remind them of outstanding items on their “to-do list,” including long-term care insurance.


Because many people are in denial that they will ever need insurance coverage for a nursing home, one type of long-term care insurance that Love finds popular with his clients is a “three-way policy.” If the investor does go to a nursing home, it will cover those costs. However, if the investor doesn’t end up going to a nursing home, they can either opt to pay their main beneficiary a life insurance payout or, after a five year holding period after purchasing the insurance, cash out and get their premium back, but with no interest, Love says.

Long-term care insurance also helps couples with one of the spouses in a nursing home who want to protect their assets from government spend-down requirements so their partner will still have adequate assets, McNeill says. Spend-down requirements vary by state, but they generally require a person to use up their assets for long-term care until they have around $100,000 left. However, if they purchase long-term care insurance, the value of that insurance plus the remaining spend-down amount are exempted from that requirement, she notes.

McNeill isn’t a fan of three-way policies or other hybrid alternatives because she doesn’t think they offer adequate coverage. She does recommend that advisers work with insurance agents to help participants select the right long-term care coverage for them from the outset, because it may not be possible to change it.

Leonard Wright, a CPA financial planner in San Diego, tells PLANADVISER “because most people have just barely enough money they retire, I advise my clients that they can do a 1035 exchange from a life insurance or annuity product into long-term care insurance, without paying taxes, which is a nice feature. It is a great opportunity to repurpose an asset.” However, one point to keep in mind, Wright says, is “some insurance companies will accept these 1035 transfers from an outside insurance company, and some will not.”

 Retirement plan advisers absolutely should help their clients face these issues, Love says. “We have a particular calling to discuss these things with our clients so they can consider the possibilities.”

Fortunately, financial firms are creating tools to help plan advisers broach the sensitive issue of retirement health care costs with participants. Genworth Financial has just launched a website, longtermcareinsurance.org, to help individuals and their advisers select long-term care insurance. HealthView Services, which provides retirement health care cost data, recently developed a health care retirement cost planning tool for members of the Insured Retirement Institute (see “IRI Partners withHealthView Partners for Care Planning”).

DC Sponsors See Value of Real Estate, but Have Concerns

Real estate has a place in defined contribution (DC) plans, the Defined Contribution Real Estate Council contends, but sponsors have concerns over valuation, liquidity and cost.

Diversification was cited as a key benefit of alternative investments in general, but plan sponsors remain somewhat confused about the definition of alternative investments, possibly skewing the pace of adoption, the council found in a survey of plan sponsors and consultants.

The council’s goal is to promote the inclusion of investments in direct commercial real estate and real estate securities in DC plans. Its members include Deutsche Asset & Wealth Management, Goldman Sachs, Prudential Real Estate Investors and TIAA-CREF, among others.

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Sponsors of DC retirement plans see continued growth in the adoption of alternative investments in plan offerings. Low correlation was seen as the primary benefit of alternatives. Lower volatility, high risk/adjusted returns and inflation protection were ranked lower in importance, and income was viewed as least important. Operational issues, including valuation and daily liquidity, remain an obstacle for some alternatives.

All survey respondents had real estate in their plans in some form, with plan sponsors and consultants generally considering real estate one of the more straightforward of alternative investments. Still, some plan sponsors and consultants showed reluctance to include real estate as an asset class among their core offerings because of slower adoption rates and perceived liquidity issues, especially with direct real estate.

Some Concerns

Direct real estate is newer to the DC market and was still perceived by some as having operational challenges. The survey found that in some ways, attitudes toward direct real estate and publicly traded real estate investment trusts (REITs) were at opposite ends of the spectrum for many plan sponsors and consultants.

Direct real estate was seen as having a low correlation to traditional assets, but lacking the liquidity and valuation of REITs. Fees were also a concern. REITs were viewed as offering liquidity and a longer history within DC plans; however, they were also thought of as too closely tied to the broader equity market—leading some survey respondents to see these funds as more of a traditional asset than a distinct alternative.

The survey findings suggest that there is opportunity to expand the offerings of direct real estate in DC plans and listed REITs as well, says David Skinner, co-president of the Defined Contribution Real Estate Council. Plan sponsors and consultants recognize the diversification benefits, but the key is to address ongoing concerns over valuation, liquidity and cost, he adds. According to Skinner, these concerns speak to the core mission of the council, which is providing an educational framework that will allow DC plan sponsors and their advisers to better understand the role of real estate in a retirement.

Interviews with decision-makers or stakeholders at 16 organizations were conducted by APCO Insight in the fourth quarter of 2013. Organizations fell within three categories: large corporate 401(k) plan sponsors representing close to$40 billion in assets (five interviews); investment consultants with assets under advisement of more than $7 trillion (six interviews); and target-date fund managers with assets under management of more than $7 trillion (five interviews).

The Defined Contribution Real Estate Council takes the position that DC plan participants should have the opportunity to benefit from the same long-term attributes of commercial real estate investments that defined benefit (DB) plan participants have enjoyed for many decades. More information about the council is on its website.

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