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Scott J. Snyder, JD, CFP®, CFA, CIMA®

We recently held an event where we discussed planning for healthcare costs in retirement.  In a survey conducted by Nationwide Retirement Worldwide, 62% of pre-retirees responded that they were “terrified” of what healthcare costs might do to their retirement assets.  The point of our conversations at the event, and day-to-day with clients, is how to better manage the risks involved and, maybe even more importantly, to help reduce the anxiety surrounding this emotionally-charged issue.

Not only are healthcare costs significant, they are often unpredictable, uncontrollable, and quite complicated.  Too often, the financial and emotional impacts occur at exactly the point of maximum vulnerability.  Unfortunately, we do not have easy answers, but good planning now can help you prepare for these future challenges.  As always, we feel the cornerstone of good planning is education.

Healthcare spending is going to be quite significant.  In its 2013 Consumer Expenditure Survey, the Bureau of Labor Statistics (BLS) measured household spending across various categories and found that healthcare costs accounted for 9% of overall expenditures for Americans aged 55-64.  After age 65, this amount increases to 13%.

The survey found, since 1982, inflation for medical costs has grown at an average rate of 5%.  Moreover, the BLS has created an “experimental” index to more precisely measure the overall inflation faced by older Americans.  This includes healthcare spending as well as all other goods and services.  The preliminary findings are that, since 1985, elderly spending patterns face an inflation rate 5.1% higher than the headline CPI rate.

CBS News.com estimates that, on average throughout retirement, someone retiring in 2015 should plan on spending a total of $266,589 on healthcare.  For someone retiring in 2025, that number jumps to $320,000.  Medicare and other health insurance can help manage those ongoing expenses.  However, we also need to have a strategy to deal with what can be one of the most devastating expenses – Long-Term Care.

Perhaps the two most commonly cited statistics for long-term care from Genworth Financial, the leading seller of long term care policies are that (a) Americans have a 70% likelihood of needing long-term care services, and (b) The national average cost per year for long-term care is $91,000.   Combined, these numbers certainly contribute to anxiety levels, but digging deeper, we find that the picture is not quite that bad.

First, the 70% probability of needing care is based on an older study by the US Department of Health and Human Services that used an expansive definition of “care” (see www.longtermcare.gov).  More recent information shows that, for men, the landscape has improved significantly.  According to the American Association for Long-Term Care Insurance 2014 Sourcebook, married men age 65 have a 35% likelihood of needing long-term care.  And men (married or not) age 75 have a 55% likelihood.  Unfortunately, for women, the probabilities have not declined as 73% of married women age 65 will likely need care.  Similarly, 72% of women (married or not) will need care after age 75.

More recent research by Hurd, Michaud, & Rohwedder in 2014 assesses this likelihood as well as length of stay in a long-term care facility.  The average stay has declined to 18-20 months, but more than half of those stays last for six months or less.  In fact, this research shows less than 10% of stays persist for more than three years.  Of course, these more rare, but protracted, stays (which often involve some form of memory care) pose the greatest financial risk.

Cost is the other area where it is important to look deeper into the general statistics.  That $91,000 national average may be interesting, but when doing your own planning, look locally.  According to CBS News.com, the national average includes a wide range of costs from the $170,000 per year cost estimate for New York City to the $54,000 estimate for the lowest-cost state, Louisiana.  A 2014 Cost of Care Survey for New York Life estimates that in Iowa and Nebraska, costs are lower than average, between $80,000 and 90,000 per year.  But again, for planning, be more specific than national or even state averages.

When it comes to planning for these costs, you really have four choices – save enough to self-insure, rely on family and friends, transfer some of the risk by buying insurance, or rely on Medicaid.  Each of these has advantages and challenges.  Today, according to the US Department of Health and Human Services, 80% of Americans “choose” in-home care provided by family members or friends.  The agency estimates it requires, on average, 20 hours per week to provide this care.  Beyond the major time commitment, caregiving is highly stressful.  In their article titled, Caregiving as a Risk Factor for Mortality: the Caregiver Health Effects Study, published in the December 1999 Journal of the American Medical Association, Schulz and Beach found that a caregiver spouse faces a 63% increase in mortality risk as the anxiety and sleepless nights take their toll.

Our society continues to change.  We are now more mobile, meaning that family members may not live close by.  In these cases, long-term care insurance can be a great tool for some but, especially lately, the insurance companies are struggling with how exactly how to assess risks and price policies.  Recently, three major providers – MetLife, Prudential, and Unum have exited the market.  Remaining firms are ratcheting up underwriting standards, particularly for women.  Studies show that 30-40% of applications have been rejected, says Jesse Slome, director of the American Association of Long-Term Care.

And, all of this is occurring before the bulk of the baby boom generation enters the market for long-term care.  Medicaid, which according to the Department of Health and Human Services, currently funds 70% of long-term costs already has sustainability concerns.  For our clients, the best advice, by far, is to look at your personal situation.  We are in the process of further upgrading our planning software so we can better help you answer questions like this.

If planning for health care costs in retirement is a source of concern for you, please give us a call.  Again, we do not profess to have easy answers, but we can work with you to assess your exposure and help you build a strategy to manage your risk.  As importantly, we can walk alongside you and continue evaluating risks and assist in decision-making over the coming years.


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