Financial advisors are helping baby boomers prepare for their retirement in more ways than ever before. However, our industry may be overlooking a significant threat to our clients’ continued comfortable lifestyle.
The secret nest-egg killer? Out-of-pocket health care costs. Many advisors are not including a discussion about these expenses in their planning process, primarily because they’re not familiar with or comfortable about discussing these costs. Yet what could be more disturbing is the notion that many clients are completely unaware of (and unprepared for) these expenses!
It seems that many of us (including advisors, insurance carriers and industry pundits) don’t really have a true understanding of these costs and how they will, in all probability, escalate during retirement. The “traditional” discussion surrounding retirement planning has taken on the tone of proper allocation of assets, not outliving income, transfer of wealth, and paying future estate taxes. However, the costs outlined below are a very real threat, and the idea is to deal with them now, before it’s too late.
Health care expenses in retirement have always been a concern, but the addition of means-testing in Medicare premium calculations (a method of setting premiums based on income) further complicates the issue. Medicare has been using this means-testing since 2008 to determine the necessary Part B premiums, and Part D became subject to this in 2011 as well.
Currently, the lowest income threshold is $85,000 for an individual—if a client earns above this amount, he can expect to pay more premium. Medicare is still one of the least expensive options available for funding health care in retirement—the current monthly premium for Part B is $104.90, and the average monthly premium for Part D is $38,1 for a total of $1,714.80 a year. For clients at the maximum means-tested bracket, the costs rise to an extra $230.80 per month for Part B (a 220 percent increase) and an extra $66.40 for Part D (roughly 75 percent)—equaling approximately $5,641.20 per person per year.2 However, the more pressing concern is where these costs may eventually be heading.
Just recently, President Obama proposed that beginning in 2017, premiums for Medicare Parts B and D would increase by 15 percent. This proposal “…would maintain the same income threshold to determine who must pay higher premiums until 25 percent of Part B and D beneficiaries have to pay the premiums.”3
That 15 percent increase should be sufficient to motivate planners to take notice!
The expected cost for Part B in 2017 will be roughly $1,568 a year per person, or a 22 percent increase from 2013 (this figure aligns with a Medicare Board of Trustees 2012 report).4 At this rate, a 65-year-old couple living until age 85 can expect to incur a cost of $99,896 for just Part B premiums alone. If they happen to be in that upper 25 percent as specified by President Obama, they will pay $319,378, or an extra $10,974.10 a year for the exact same coverage. All of a sudden, these six-figure expenses don’t seem so insignificant.
These numbers are real, and our industry is slowly beginning to embrace this reality because this is an issue that every single client of ours is going to have to ultimately address. If we continue using our existing retirement planning models without incorporating health care expenses, the income solutions we provide could fall significantly short of our clients’ expectations. Simply hoping should never be a part of your client’s financial strategy.
Footnotes:
1. www.webmd.com/health-insurance/medicare-part-d-prescription-drug-plans
2. www.medicare.gov
3. http://nbcpolitics.nbcnews.com/_news/2012/12/10/15824325-in-fiscal-bargaining-buzz-over-means-testing-grows-louder?lite
4. http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/downloads/tr2012.pdf
