Baby boomers planning for retirement have a lot of financial issues to weigh: where to invest funds for one's golden years; how best to spend down assets while minimizing portfolio risk; what to set aside for travel and other leisure activities; and establishing a legacy for the next generation.
Often overlooked in retirement income planning is one wildcard that could affect all financials, and has potentially catastrophic consequences. That variable is health care costs. If you're not considering these expenses as part of your retirement planning, you should be.
One company that does factor health care costs into retirement planning is Edward Jones, the Missouri-based financial services firm with a branch network of more than 12,000 locations servicing 7 million clients and $914 billion in asset under management worldwide. Catering to individual investors and small-business owners, the company recently unveiled a survey of more than 1,000 non-retired and retired Americans on health care costs in retirement. Conducted by ORC International, the CARAVAN Omnibus survey reveals these expenses to be a significant — and growing — worry of respondents, most especially boomers nearing retirement.
"There are usually two inter-related concerns that rise to the surface when we do surveys on retirement," says Scott Thoma, a principal and investment strategist for Edward Jones. "One is running out of money. The second is paying for health care expenses."
On the latter count, apprehension is widespread, most especially among the 78-million-strong baby boomers, many of whom are now retiring. Nearly 7 in 10 (69 percent) of the boomers polled say they're "concerned" about retirement health care costs; 41 percent note they're "very concerned." In contrast, less than 1 in 5 (19 percent) of millennials expressed unease.
Boomers' fears are not displaced. A recent survey from HealthView Services, "2016 Retirement Health Care Costs Data Report," pegs health care costs for a 65-year-old healthy couple retiring today at $288,000. When you add dental, hearing, vision and other out-of-pocket expenses, the total retirement health care bill rises to $377,412 — a lot of money from, say, a $1 million nest egg.
One reason for the big tab: fast-rising health care costs (up 7 percent last year), which is outpacing the general inflation rate (0.7 percent). The biggest contributor to increasing health care costs is Medicare Part B, which covers hospital and doctor visits. These costs rocketed 16.1 percent last year.
All worrisome numbers, to be sure, but not necessarily as difficult to manage as the aggregate costs suggest. The key to preparing for unexpected physical and mental ailments later in life, says Thoma, is proper planning. That starts with breaking projected health care costs into smaller chunks, to wit: estimating the outlay on annual basis.
"If you look at the average expenses for an individual in retirement, based on premiums for Medicare, our estimates peg the total at from $4,500 to $6,500 per year," says Thoma. "These to me are much more manageable amounts."
They're costs, too, that an advisor can help clients cover with protection products in situations where they're unwilling or unable to dip into retirement assets to fund out-of-pocket health care costs. Among the solutions available are stand-alone long-term care and critical illness insurance, as well as linked-benefit life insurance and annuities that come with optional LTC, critical illness and chronic care riders.
The latter hybrid products are increasingly in demand among prospects, particularly middle income Americans who cannot afford the premiums of stand-alone policies and are looking to offset a portion of medical or long-term care costs in retirement.
LIMRA's 2015 Individual Life Combination Products Annual Review, unveiled last April, shows that new premiums for such combo products totaled $3.1 billion in 2015, representing 15 percent of all new premium collected for individual life insurance products.
The study found that products with chronic illness acceleration riders grew 38 percent in 2015, accounting for 59 percent of the combination life insurance market. Products with long term care acceleration riders experienced stronger growth in 2015, up 51 percent from prior year, but only represent 28 percent of the market.
Though popular, the dual-purpose solutions may not always be adequate to meet health care or related expenses not covered by Medicare, hence the need to carefully analyze contract provisions, particularly those detailing when the policies will pay out — and when they won't.
