Help clients afford health care in retirement

No matter who crunches the numbers, there’s one thing retirees can expect: high health care bills. Along with housing, health care is among the biggest of retirement expenses, and yet it’s one that not enough people plan for.

According to a 2016 survey from Nationwide Retirement Institute, the majority of people 50 and older either don’t know what their health care costs will be or wildly underestimate them.

“Many people don’t know how much money they need for retirement in general, let alone how much they will need for health care,” said Paul Fronstin, director of the health research and education program at the Employee Benefit Research Institute (EBRI).

The survey also found that 64% of people are “terrified” of the impact of runaway medical expenses on their retirement plan. They’re right to be concerned. According to Fidelity, a 65-year-old couple can expect to shell out $260,000 for health care during retirement. The EBRI, which tracks retirement readiness, says that a retiring couple should budget $350,000 if they want a 90% chance of not running out of money.

There are ways, however, that CPAs can help clients find strategies to prepare for the costs of health care in retirement—and alleviate their fears about those costs. Fronstin and CPA financial planners offer suggestions for how clients can plan for health care liability today to reduce their financial exposure in the future.

• Reframe the costs. To quell her clients’ anxiety about health care spending in retirement, Brooke Salvini, CPA/PFS, principal and owner of Salvini Financial Planning in Avila Beach, Calif., explains that the seemingly massive amounts are paid out over a 30-year span or more. She has them think of the sums as part of their monthly retirement budget—a more manageable concept.

• Use health savings accounts as a sources of money. Sheryl Rowling, CPA/PFS, principal of Rowling & Associates in San Diego, recommends that pre-retirees put money in health savings accounts (HSAs), which allow for tax-free deposits and tax-free health related withdrawals.

“If you can load up on your HSA, by retirement you will have a large pool of tax-free savings to fund medical care,” she said. “That’s triple tax efficiency because you get a deduction upfront, pay no tax on the earnings, and can withdraw money tax-free.”

• Take control of your health care spending. “We have to be good shoppers and good consumers,” Salvini noted. Retirees—or their caregivers—must be ready to question doctors about the necessity of all tests and procedures, she said. And families need to have honest end-of-life discussions, and think about when to opt for palliative care instead of costly, invasive treatments.

• Use insurance to reduce uncertainty around health care costs. Part of the reason health care is so difficult to plan for is because it’s so variable. At 45, it’s hard to know what your health status will be in 20 or 30 years. As Fronstin pointed out, it’s much easier to estimate the cost of insurance premiums rather than what you’ll pay out-of-pocket. To reduce uncertainty around health care costs, he suggests that people anticipate having robust insurance coverage—such as a comprehensive Medigap plan—in retirement, and factor the cost of that insurance into their retirement plans.

“These premiums are much easier to figure out today than what you’re going to spend out-of-pocket in the future,” he said. “You want to reduce uncertainty as much as possible.”

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• Consider long-term care insurance. Long-term care costs can be entirely unpredictable—and substantial. “Drugs can be expensive, and hospital stays are expensive, but that’s not what breaks people,” Rowling said. “What breaks people is long-term care.”

Here’s why: The average annual cost of a semiprivate room in a nursing home is $82,128, according to Genworth’s Cost of Care Survey. Though almost three-quarters of people stay in a nursing home for less than three years, a small minority, especially those with Alzheimer’s, can require care for many years. Fidelity says a couple should budget $130,000 for long-term care on top of the amount they budget for other health care expenses.

For that reason, many CPAs encourage their clients to get long-term care insurance when they are in their 50s. Policies can be expensive, but for people who wind up using the benefits, they can be a lifesaver.

The cost of long-term care often exceeds that of long-term care insurance. “Every time I’ve looked at the numbers, I’ve found that you just can’t take that same amount you’re paying in premiums and come up with the pot of money you’d need for care,” Salvini said.

• Think about continuing care retirement communities. For clients who have not purchased long-term care insurance, Rowling sometimes recommends considering a continuing care retirement community (CCRC). CCRCs allow people to first live independently, and then move into a facility on the same campus that provides more health care services as their health declines. Some CCRCs require a sizable deposit plus monthly rent; others, only rent.

However, as Rowling noted, if you want to move to a CCRC “you have to do it when your health is still good.” People with serious health problems won’t be able to purchase housing in CCRCs.

• Consider annuities and home equity as sources of funding. One client of Rowling’s was in her late 70s when she sold her home. The woman used the $500,000 she received from the sale to buy an immediate annuity, which entitled her to $60,000 of income a year. She moved into a continuing care center and the annuity covers her expenses. She is now in her mid-90s.

Rowling said that usually she doesn’t recommend annuities, but notes “there are times when that’s the best option.”

Getting clients focused on health care early will improve their overall readiness for retirement. Though the cost of health care will remain a bogeyman for many, strategies like these can help reduce clients’ anxiety about costs and help them find solutions that work for their budget.

Ilana Polyak is a Massachusetts-based freelance writer. To comment on this article, email Chris Baysden, AICPA senior manager of newsletters.