While the rate of cost increases for health care shows signs of slowing, J.P. Morgan analysts say individuals retiring without an effective plan in place to meet growing health care costs could face serious financial hardship late in life. Increasing health care expenses are a challenge for participants in both defined contribution (DC) and defined benefit (DB) retirement plans, the analysis shows. DC participants without adequate savings can easily deplete their retirement accounts paying for health care, while those lucky enough to have a lifetime pension can see their income stream outpaced by ballooning expenses.
Sharon Carson, a retirement strategist at J.P. Morgan Asset Management, tells PLANADVISER the financial advisory industry is starting to pay closer attention to health care and other specific costs clients face in retirement. She says it’s an encouraging trend in terms of improving participant retirement outcomes, but more engagement and innovation is clearly required to ensure retired plan participants will be able to pay for the health care they’ll inevitably need.
“We are seeing the industry starting to pay more attention to these issues, but there are still some hurdles preventing adequate advice and guidance on the subject of health care expenses in retirement,” she explains. “When you look at workplace financial advisers in particular, very rarely are they licensed to sell health insurance, so that’s a challenge right there. And Medicare and the other government programs get very complicated when you start to get into people’s personal situations and actually making elections.”
As Carson explains, advice on defraying health care costs through specific insurance products and government benefits will likely always fall outside the purview of the traditional retirement plan adviser, who is more focused on things like portfolio building. To help a client chose which Medicare option to take requires insights about what prescription drugs the individual may be on, Carson adds. It also requires insights about other health and lifestyle factors that are almost certain to fall outside the depth of the normal adviser-client relationship. Even armed with substantial plan-related demographic information, the adviser isn’t likely in the position to give this kind of guidance.
However, this does not mean the adviser should not work with clients on the more general subject of planning for health care costs later in life.
A good middle ground for advisers, Carson says, is to help clients understand their retirement savings will face huge pressure from things like health care costs. For example, advisers could help impart the message that even solidly middle class retirement plan participants will likely see lifetime retirement health care costs exceed the total value of their anticipated Social Security benefits, according to the Retirement Health Care Cost Index from HealthView Services.
The index measures the percentage of Social Security benefits required to pay for health care-related costs in retirement for a healthy couple receiving the average projected Social Security benefit at full retirement age. The index indicates that retirement health care costs will increase from 69% of Social Security benefits for a couple retiring in one year to 98% of Social Security benefits for a healthy couple retiring in 10 years. For couples retiring in 20 years, 127% of Social Security benefits will be required to cover health care costs, and couples retiring in 30 years will need 190% of their Social Security benefits to cover lifetime health care costs, should current trends hold.
For an average healthy couple retiring in 2015, index data shows retirement health care costs will amount to approximately $366,599 in today’s dollars. In another 10 years, reflecting estimated health care cost inflation and Social Security cost-of-living adjustments, lifetime costs will rise to approximately $421,083 in today’s dollars.
These are the key lessons for advisers to impart to retirement plan clients, Carson says. One piece of good news to share with clients is that, while health care expenses will almost certainly rise as life goes on, other expenses fall, especially things like mortgage debt and the costs of supporting children.
“For younger clients, it’s about helping them to save early and save as much as possible,” she explains. “You must make the case that Medicare and the other programs are too far away and could change substantially by the time this group hits retirement. So it’s a message of personal accountability and not relying on the government or an employer to support the health care costs in retirement.”
For clients who are older and closer to the retirement date, it’s time to become more detail oriented.
“The older client group requires more specific spending plans that look at what expenses will be there in retirement,” she says. “Maybe in a few years the client will have their mortgage paid off, the kids will be out of college, maybe some other debt will be paid off, suggesting the growth in health care costs may not be so devastating. Or the client may find their outlook is bleak, so they will need help budgeting and figuring out how they can invest more and better time their retirement.”
Helping clients effectively time Social Security is another big opportunity for the adviser, she says, but this can be challenging. The adviser can also help identify the discretionary expenses that can be pushed down as health care costs go up. It's not necessarily a glamorous role to play, but the adviser is in a good position to help clients get realistic about what they will be able to afford in retirement, Carson adds.
“The important thing for the adviser is to help individuals think ahead about these issues—much of the hardship can be reduced by effective planning, especially when the individuals are younger and have a lot of time to prepare,” Carson says. “Financial advisers have shied away from all this historically because it is just so complicated, but their effort to improve plan outcomes means they will need to get more engaged on the health care question.”