Preparing Your RIA Clients for Future Healthcare Costs
By Jon Talamas
Clients recoil from discussions of funding retirement healthcare. Why? Because the numbers are so big. Here’s how to make planning less intimidating.
It’s no wonder your clients get worked up when they think about paying for healthcare in retirement. According to the latest Fidelity estimate, couples retiring in 2022 would need $315,000 to pay for care. That’s $274,000 more than they originally thought ($41,000).
Part of the problem is that many clients don’t realize that Medicare services aren’t totally free. Those rendered under Medicare Part A (hospital stays); however, Part B care (doctors and other medical providers) won’t be. According to Medicare rules, people filing Part B claims must pay for 20% of the cost. Their out-of-pocket tab can be significant depending on how many doctor’s visits and medical supplies they need.
Furthermore, many people underestimate how much care they’ll need for their chronic medical conditions. By the time they retire, about 80% of Americans will have at least one chronic illness, and 60% will have at least two. Since these illnesses will last for the rest of their lives— over which time their expenses will keep growing— clients often get sticker shock at the potential healthcare costs ahead.
Falls and other accidents also are a significant risk. Producing $30 billion in Medicare costs each year, they can lead to fractures and other complications that require long-term care. And let’s not forget the cost of prescription drugs. Many seniors take five, ten prescriptions or more to maintain their health. But even with drug coverage, their out-of-pocket outlay can reach $500, $1,000 or more per month.
Finally, assuming that the COVID-19 pandemic continues long-term, being hospitalized with a severe case— or ending up with long COVID— can have devastating consequences on a retiree’s healthcare budget.
The Healthcare Cost Remedy: Education
As with all daunting things, it helps to break down retirement healthcare funding into smaller pieces. You can do this by offering education and planning to your clients.
Funding retirement healthcare expenses should be a major topic of your discussions with nearly all pre-retiree and retired clients. For the former, stress that if they want to retire before age 65, they’ll need to pay for their own care until they enroll in Medicare. According to Schwab, there are many options to secure this coverage:
- Enrolling in a Health Insurance Marketplace (Affordable Care Act)
- Electing COBRA benefits (for those exiting a company health insurance plan)
- Buying on the private health insurance market
- Using employer-paid retiree insurance (most often with public-sector workers)
- Accessing coverage from a spouse’s employer plan
A final option is to keep working in the same job or for another employer that provides part-time employee health insurance.
Another key point: advise clients on what they can expect to receive from Medicare, Medicare Advantage and Medigap (supplemental health insurance). Remind them they have to enroll in Medicare at certain times. If they miss the deadline, they might create coverage gaps or suffer financial penalties.
Teaching clients about Medicare is a challenge in itself. Because the program has so many moving parts—Parts A (hospital), B (medical), D (drug coverage) and Medicare Advantage, each with various out-of-pocket cost elements—refer clients to a good online tutorial. Then make yourself available to answer their questions.
Also, discuss the importance of realistically assessing retiree healthcare costs based on their projected longevity, chronic conditions, prescription drugs and residence. Experts suggest anywhere from $450 to $600 a month should suffice for the entirety of their retirement. Your retirement-planning software engine can provide a more precise estimate based on a client’s specific health, longevity and financial resources.
Then advise clients to take full advantage of their employer’s Health Savings Account (HSA). This will allow them to save pre-tax dollars today to pay for tomorrow’s qualified medical expenses. The money they place in their HSA then accumulates tax-free. On the back end, there will be no taxes due as long as the money is used for qualified medical expenses.
The elephant in the room regarding retiree healthcare? Long-term care (LTC). Explain that Medicare does not cover custodial services. It only pays for skilled-nursing care. That means most of your clients will at some point need long-term care and must be prepared to pay for it out of pocket or with private LTC insurance. Since fees can be high, this issue is best handled in a separate planning discussion.
The Healthcare Cost Remedy: Planning
Education is a great starting point. But nothing beats effective planning to assess and solve for future healthcare needs. And here comes the good news: the plan doesn’t have to create the $315,000 lump sum mentioned earlier. It only needs to produce funds to cover a little over $2,000 yearly in healthcare expenses, based on retirees having no or only one chronic condition. That number increases to roughly $5,700 annually for people with two to three chronic conditions.
That means it’s highly feasible to plan for these known and relatively stable costs without alarming your clients. According to Michael Kitces, a practicing financial planner and well-known industry blogger, this will involve doing a combination of the following activities:
- Setting aside money during the working years to cover healthcare costs
- Making good use of employer-provided HSAs
- Maximizing the Premium Assistance Tax Credits when clients are using marketplace insurance before enrolling in Medicare
- Enrolling correctly and at the right time in Medicare
- Selecting the best Part D prescription drug plan based on the client’s current drug regimen
- Purchasing Medigap supplemental health insurance while finding the right balance between higher premiums and lower out-of-pocket costs
Many of these planning topics, as well as the educational points mentioned earlier, are complex. This means before advising your clients, educate yourself about the nuances of retirement healthcare funding. There are countless industry resources available to build your knowledge. Since most clients know little about this topic, even modest self-education will elevate you in their eyes. Given the importance of staying healthy and solvent in retirement, your clients will highly value your assistance.
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