A Newly Suggested Strategy for Managing Health Costs in Retirement

A report from Healthy Capital suggests a combination of managing health conditions and purchasing staggered annuities can help fund health care expenses in retirement, but concedes that the right strategy depends on the situation.

Health care cost projections illustrate how managing medical conditions through simple, positive lifestyle choices can result in measurable savings for health expenses in retirement, according to a new report from Healthy Capital in collaboration with the Insured Retirement Institute.

In addition, the report explains how utilizing annuities to provide guaranteed income helps address Americans’ concern for affording health care in retirement. A case study details how utilizing the savings through condition management can fund staggered annuities and create a lifetime income stream.

In the case study, Susan is a 30-year-old professional who just purchased a home and had her first child, but also has type 2 diabetes. The report data shows that between ages 65 and 85, Susan can expect to incur more than $1,000,000 in future costs for Medicare Part D, Medigap premiums, and out-of-pocket expenses. In order to fund this, Susan would have to invest slightly more than $11,600 per year (or $171,769 in a lump sum) in a product that nets 6% annually.

The plan to pay for health care expenses starts with healthy behavior. By managing her type 2 diabetes, Susan learns that in addition to increasing her life expectancy by ten years, she will spend less on annual medical-related expenditures because her new healthy habits translate into fewer doctor visits, services needed, prescription drugs, catastrophic events, and procedures, the report notes. If Susan begins immediately, she can reduce her lifetime health care expenses by more than $190,000, which, when invested in an account that nets 6% annually, will grow to over $240,000 by age 60 (when she purchases her first two annuities) and another $90,000 by age 75 (when she purchases her last annuity).

Managing her condition will also produce average pre-retirement annual health care savings of just over $4,500. Now, Susan’s annual savings goal of $6,675 per year is reduced by more than two-thirds, and she will only have to save $2,175 per year in order to make the initial annuity purchases at age 60 that will help cover her future health care costs.

According to the report, a person’s investable assets, tolerance for risk, general and lifestyle expenses and current health status are important determinants of the level of funding and types of investment and insurance products that should be used to design a health care funding plan. Also, staggering the purchases inherently allows for adjustments to the portfolio (based on changes in health status): an annuity may make sense for Susan at age 60 or 65, but if her health declines by age 75 it may make more sense to use a mutual fund, laddered bond portfolio, or other non-insured approach instead of the immediate annuity.

Annuities require a larger total payment to achieve health care-funding goals. However, while capital-market investments need certain levels of performance to generate income, annuities incur less risk, provide mortality credits (the boost to income resulting from the pooling of longevity risk), and may be a better alternative for an individual investor depending on his/her risk tolerance, the report contends.

Ron Mastrogiovanni, CEO of HealthyCapital and HealthView Services, tells PLANADVISER, “The key is education. Product mix may have a significant impact on disposable income in retirement. Different product types impact taxes, hundreds of thousands of dollars in Medicare surcharges and for how long assets will generate income in retirement. Therefore it is important to optimize income in retirement by including the best mix of capital market and insurance products.”

In addition, Mastrogiovanni suggests plan sponsors that have high-deductible health care plans, should include health savings accounts (HSAs) as an option.

Although the case study in the report starts with an individual at age 30, the report says the concepts in this case are applicable to those with other conditions and within different age groups. Modeling shows that regardless of the condition, individuals who manage their health conditions well can add years to their lives (from three to six) and significantly reduce their annual medical expenditures. The accrued savings, if invested, can be worth between $120,000 and $437,000 at retirement age, depending on the condition.

The paper concludes that health-management conversations (which can be started by plan sponsors) can open the door to the appropriate investment products which may provide peace of mind to many Americans who are concerned about paying for health care in retirement. In addition, advisers need to build health care into planning conversations—a topic that crosses all demographics.