James Sullivan
James Sullivan

Financial Health and Physical Health After Age 65

Why your clients are worried about their healthcare costs after age 65 with good reason.

June 14, 2010
by James Sullivan, CPA, PFS

A healthy 65-year-old can expect to spend more on healthcare costs in retirement than will his or her unhealthy counterpart. In a May 2010 study from the Center for Retirement Research at Boston College (Does Staying Healthy Reduce Your Lifetime Healthcare Costs?), the authors found:

… that although the current healthcare costs of healthy retirees are lower than those of the unhealthy, the healthy actually face higher total healthcare costs over their remaining lifetime. To illustrate, the expected present value of lifetime healthcare costs for a couple turning 65 in 2009 in which one or both spouses suffer from a chronic disease is $220,000, including insurance premiums and the cost of nursing home care and five percent can expect to spend more than $465,000. The comparable numbers for couples free of chronic disease are substantially higher, at $265,000 and $570,000 respectively.”

This excerpt from the study demonstrates the difficulty of planning for retirement healthcare costs. It is counter intuitive — the healthy incur greater costs than the unhealthy. Why? On average, healthy couples will live longer and begin to incur high healthcare costs as they age (long after the unhealthy are dead). This obviously is a “good news, bad news” situation that often accompanies these types of studies. Healthy or unhealthy, the average cost is expensive and the potential range of costs is very wide (healthcare for a healthy couple may cost $265,000 but could be as high as more than twice that figure).

A study from the Urban Institute, Will Healthcare Costs Bankrupt Aging Boomers? (February 2010) points to the increasing out-of-pocket healthcare costs faced by older Americans (the Urban Institute study does not include long-term care expenses):

The share of adults age 65 and older spending more than a fifth of their household income on healthcare — a common measure of burdensome costs — will increase from 18 percent in 2010 to 35 percent in 2030 and 45 percent in 2040.”

If, due to increasing longevity, more retirements last 30 or more years, the retiree is likely to see a large increase in how much of his or her income is consumed by healthcare costs. As they age and their health deteriorates, healthcare costs will become unaffordable. Even upper-middle-income retirees have a good chance of experiencing rapid erosion of their retirement nest egg and spend their last few years in healthcare cost induced poverty.

All of this must be read against the backdrop of Medicare’s rising healthcare costs and the growing number of participants, as more and more baby boomers reach age 65. Congress will either cut benefits or require greater cost sharing by beneficiaries. In other words, for the Medicare participant, cost sharing will increase. According to a study from the Heritage Foundation (Illusions of Cost Control in Public Health Plans, July 2009), in 1997 out-of-pocket costs paid by beneficiaries equaled 11.5 percent of total Medicare spending. By 2005 this had increased to 15.7 percent. “Total healthcare spending” the report states, “is growing more than twice as fast as the part covered by Medicare, shifting larger shares to out-of-pocket spending …”

Financial planners rarely discuss these healthcare financing issues in depth with their clients. This needs to change to give clients a more realistic picture of their retirement and to raise the question of whether they have sufficient savings to retire at their target date.

Concerned Clients

Do your clients share this concern? Chances are they do, even if they haven’t raised the issue yet. Clients may not be familiar with the recent studies or the mind boggling numbers, but that does not mean they are not concerned about the affordability of healthcare after age 65. In a March 2010 Age Wave/Harris Interactive poll (sponsored by Genworth), 45 percent of the respondents were identified as being able to pay for medical expenses not covered by insurance because the topic that most worried them. This was their number one concern. A distant second at 21 percent was “outliving my money”.

In terms of long-term illness, 55 percent of the Age Wave/Harris Interactive poll respondents stated that their greatest fear was becoming a burden to their family. When asked what they thought was the most important reason to include long-term care planning as part of their financial strategy, 68 percent responded “to not have to be a burden on my family.”

Meeting healthcare and long-term care costs after age 65 is a very complex and emotional issue for clients. It encompasses a host of unpleasant topics from aging and poor health to the loss of independence and changing family relationships. Add to the mix the client’s finances and it is easy to see why this is a difficult topic to discuss. But raising the issue and helping clients deal with it directly may be the most important service you can provide to your clients.

It is at the intersection of financial health and physical health that the CPA/PFS planner can play an important role for his or her clients. Proper retirement planning should include careful consideration of healthcare costs. The numbers are too big to ignore. The planner cannot just roll healthcare costs into simplistic estimates of monthly living expenses. One thing is clear, clients are concerned and if you don’t address these issues with your clients you can bet someone else will.

Wealth and Health

The oldest baby boomers turn 65 this year. They are now eligible for Medicare. The surveys demonstrate that as they age, the focus of boomers has shifted from wealth accumulation to wealth preservation, their health, maintaining their independence and not becoming a burden to their family. CPA/PFS advisors must be prepared to accommodate this change of focus. While many planners are prepared to discuss “decumulation” of retirement savings, few are as well prepared to discuss healthcare financing after age 65.

For the wealthiest clients, the increasing costs of healthcare will make little difference to their planning or lifestyle. For middle and upper middle class clients, these escalating healthcare costs must be discussed and planned for. The Medicaid safety net that many middle class clients relied on to cover long-term care costs is disappearing as states, facing large budget deficits, cut back on Medicaid.

Advisors must begin setting aside time to discuss healthcare planning with their clients as a separate topic. Clients who have yet to retire, need to be educated regarding the potential costs of healthcare and the impact on their retirement plan if their costs are higher than average. They must be educated regarding how healthcare coverage works after age 65 and what decisions they face. These decisions will impact their investments, future planned withdrawals, Social Security and whether the client has sufficient assets to retire.

For clients who are retired, the advisor must begin by gathering information on the client’s current healthcare coverage (Medicare Supplement plan, Part D — prescription drug — coverage, plans for funding long-term care). Given the potential costs and impact on the client’s quality of life, it is more important than ever that the advisor assist the client with making decisions regarding the financing of their healthcare costs.

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James Sullivan, CPA, PFS, MAS, is an investment counselor at Core Capital Solutions LLC. He has almost 25 years of experience in individual tax, investing and personal financial planning. Before joining Core Capital Solutions, Sullivan spent 20 years at Arthur Andersen LLP. He is a member of the AICPA PrimePlus/ElderCare Task Force. PFP Section members, including PFS credential holders will benefit from additional Medicare resources in Forefield Advisor on the AICPA’s PFP website at aicpa.org/pfp. Non-members can click here to join the section.