If you ask Griffin Geisler what topic he thinks he’ll spend the most time talking to clients about in 2017, one issue clearly rises to the top: health care.
Geisler isn’t a health care provider, nor does he work in the health insurance space. He’s a wealth strategist with RBC Wealth Management-U.S., and he specializes in retirement income planning.
As the complexity of the health care payments system increases and health care costs continue to rise, the issue of health care affordability has become a key financial concern, particularly for Geisler’s clients who are nearing retirement or already retired.
“Social Security was a big concern for a long time, and it still is, but today we’re seeing an increase in demand for information about health care options in retirement and how people can afford those options,” says Geisler.
And it’s a concern not only among middle-class Americans, but also among high net worth individuals. In a recent survey, 67 percent of RBC Wealth Management clients surveyed listed funding their own health care costs as a key concern.
“Over the course of the past year, the conversations we have been having with clients have become more nuanced,” says Geisler. “They have shifted from ‘Do I have enough to retire?’ to ‘Can I afford health care once I leave the workforce?’”
Why health care costs so much in retirement
Today, health care is the fourth-highest spending category for Americans between ages 65 and 74, after housing, transportation and food. But health care moves up to second place for people 75 and older, according to the Consumer Expenditure Survey from the U.S. Bureau of Labor Statistics.
Over a 25-year period, Medicare Part B premiums, Part D prescription-drug plans and a Medigap supplemental insurance policy can easily cost a few hundred thousand dollars, according to a recent article in Kiplinger's. And that does not include dental and vision care, hearing aids and out-of-pocket drug costs, the article notes.
“The real impact,” says Geisler, “comes when you look at the fact that out-of-pocket health care expenses become a greater expenditure as people age.”
Paul DeLauro, head of Wealth Planning for City National Bank, agrees. “Health care costs aren’t just limited to medical devices, prescriptions and doctor’s visits,” he says. “Many of us will need long-term care. Physical disabilities and degenerative diseases, such as Alzheimer’s, will claim most of us at some point in time, and paying for long-term care is becoming out of reach for most Americans.”
Health care spending is projected to grow at an average rate of 5.8 percent from 2012 to 2022, according to the Centers for Medicare and Medicaid Services. This explains why rising cost of health care is weighing on the minds of American retirees and pre-retirees alike.
How much should the average retiree expect to spend on health care? A study from the U.S. National Library of Medicine, National Institutes of Health offers a sobering answer: the average American spends more than $300,000 on health care over their lifetime, with 60 percent of those expenditures coming after the age of 65.
“It’s frightening how large an expense it is for people,” Geisler says. “And most people don’t estimate it right.”
Geisler suggests using the Kaiser Family Foundation subsidy calculator to estimate costs. AARP also offers a Health Care Costs Calculator that is designed to help estimate health care costs in retirement.
At RBC Wealth Management, Geisler is working closely with financial advisors to help estimate health care costs for pre-retiree and retiree clients. Doing so is critical to retirement planning, he says, given that health care is likely to consume a large percentage of a retiree’s income.
Know your options
Once an individual realizes just how much of their retirement savings they will have to allocate to health care, it’s time to explore some of the options.
First and foremost, retirees must understand the various health care programs are available to them as well as the premiums and out-of-pocket costs associated with those programs.
It’s also a good idea to look into tools such as flexible savings accounts (FSAs) and health savings accounts (HSAs). An FSA can help lower an individual’s adjusted gross income, either for tax purposes or so that they qualify for certain benefits. An HSA enables anyone to put aside money for health care expenses. That money grows tax free assuming you eventually use it for qualified medical and balances can carry over from one year to the next.
For people under the age of 65 contemplating retirement, Consolidated Omnibus Budget Reconciliation Act (COBRA) coverage or a retiree medical plan from their previous employer, may be available. Individuals with a spouse who’s not yet retired may want to consider getting coverage on their spouse’s employer benefits.
For others, part-time employment that offers health benefits may be a viable option. Geisler observes that some retirees, even those with significant retirement assets, take on a part-time job largely for the health care coverage.
DeLauro, however, suggests that it’s better to start well ahead of retirement. Good financial planning often hinges on acquiring insurance during one’s working years to offset the costs of long-term care. Long-term care insurance typically reimburses policy holders a daily amount to offset assisted living costs, such as those associated with bathing, eating and dressing.
However, many insurers are moving away from the long-term care business, making it increasingly difficult to buy a long-term care policy. “Grab a policy if you can, while you can,” DeLauro advises.
“If you have a solid, predictable income and can afford the annual expense, obtaining a long-term care policy may be the wisest thing you ever do,” he says.
It’s also critical to understand your health care needs within the context of your overall retirement plans and goals. “Cash-flow planning is the key,” says DeLauro. Any detailed forward-looking budget must include the cost of long-term care. Only then will you have a true picture of your future financial situation. It could be that a long-term care policy is the key component of your future cash-flow survival.”
For retirees 65 and older, Medicare is key, Geisler says. Everyone who turns 65 must enroll to receive Medicare benefits if they are not already receiving Social Security benefits. The only exception to that requirement is if an individual is still working and covered under their current employer’s health care plan, in which case he or she can delay enrollment.
“Retirees who don’t enroll in the program at age 65 will find they are subject to some pretty hefty penalties,” Geisler says.
Retirement planning experts like Geisler and the financial advisors he works closely with are spending more and more time helping clients understand the different parts of Medicare (A,B, C and D), and how much they will have to pay for each of those benefit plans.
Retirees and pre-retirees who aren’t working with a financial advisor can seek assistance from their local state health insurance program office – or Statewide Health Insurance Benefits Advisors in some states –in addition to online resources available at Medicare.gov.
“Figuring out how much health care in retirement will cost and how to pay for it can be daunting,” Geisler says. “But by working to understand those costs and options early, retirees and pre-retirees can better prepare themselves and regain some peace of mind.”
- Medicare Part A - “hospital insurance”
- No additional cost
- Medicare Part B - “medical insurance”
- Income-based monthly premium
- If you decline Part B at 65, premium increases 10% per year, unless covered by an employer’s plan
- Medicare Part C – “Medicare Advantage” Private insurance options
- Health insurance plans offered by private companies approved by the Federal government but not regulated under Medicare
- Medicare Part D – Prescription drug program
- Voluntary with monthly premium, plus income-based surcharges