Millions of older American workers and retirees are grappling with the challenge of creating a secure income stream that may need to last 30 years or longer, and one area that must be at the forefront of financial planning discussions is the potentially devastating impact of excessive health care costs.
As Ron Mastrogiovanni, founder and CEO of HealthView Services, recently told ThinkAdvisor, the health care game has changed entirely for current and future retirees relative to prior generations.
Alongside the decline in defined benefit pension plans, corporate America has also shifted rapidly away from providing supplemental retiree health care support, even for long-tenured workers. This means Americans are increasingly left to rely on their own Social Security, private savings and Medicare to address the often mountainous cost of care, Mastrogiovanni observes.
The potential costs of long-term care, prescription drugs and hospital stays can derail the financial plans even of retirees with millions in the bank, especially in cases of chronic physical or cognitive illness.
What this all means for financial advisors is clear, Mastrogiovanni argues: They must bring better health care cost analysis into the financial planning equation.
What's Happening With Retiree Care Costs?
To demonstrate the challenging nature of health care cost projections, Mastrogiovanni points to a recent article published by The New York Times showing the average annual cost to the government per Medicare beneficiary has not significantly increased since 2010.
While this is a notable trend, Mastrogiovanni says, advisors and their clients should not assume this means that health care costs incurred by individual retirees have not been rising. Instead, a deeper look at key data points conducted by HealthView Services reveals demographic changes are at the heart of this seeming contradiction.
As the analysis explains, the first baby boomers started to retire in the late 2000s, and they have been entering retirement at a rate of around 10,000 a day ever since. Driven by this demographic wave, the number of Medicare recipients has increased by 39.8% since 2010, jumping from 47.2 million to 65.8 million.
As a result, the proportion of the 65-and-older population has skewed younger and healthier relative to historical averages and especially compared to a decade ago.
"Since health care costs are highest toward the end of retirement as health declines, the average annual cost per retiree under Medicare will naturally be lower for a younger population," Mastrogiovanni explains. "Looking forward, aging baby boomers will eventually make for an older and less healthy retiree population."
This will naturally result in significantly higher average per-beneficiary expenses, assuming all else remains equal, and it underscores the point that individual costs and population costs are different animals.
Today's near retirees and early retirees should not take the recent Medicare spending data as a sign that they will somehow benefit from health care cost deflation or even stability, Mastrogiovanni says. Sadly, he says, the opposite is true, and action must be taken early to ensure clients have the best chance of meeting their spending needs.
What It Really Takes to Be Ready
According to HealthView Services, although the U.S. has seen a dramatic increase in Medicare Advantage enrollment over the last decade — which was expected to reduce costs to the government — industry data indicates that this trend, too, has not had a particularly beneficial impact on government costs.
