A white paper from HealthView Services, “Addressing the Retirement Health Care Cost Crisis: Cost Management Strategies,” finds that retirement health care costs are going to be a significant burden for future retirees and one that most of them have not planned for. The paper notes that for employees who do not plan for these costs, retirement will be an even greater financial challenge for them.
However, those participating in defined contribution retirement plans, such as 401(k)s, are at somewhat of an advantage for dealing with these challenges, says Ron Mastrogiovanni, founder and CEO of HealthView Services. Mastrogiovanni, who is based in Danvers, Massachusetts, tells PLANSPONSOR, this is because once participants are aware of what replacement ratio for income they will need during retirement, they can adjust their employee contributions accordingly.
However, cautions Mastrogiovanni, the replacement ratio calculations that many companies use often do not factor in health care costs and this needs to change. “Health care costs can significantly alter the replacement ratio and unlike an expense such as travel, health care is not something that a participant can downsize,” he says.
The paper mentions how the increased longevity of participants has also become a factor in both retirement planning and health care costs during retirement. Plan sponsors need to make participants aware that they will be spending more years in retirement and will need to put away for health care costs, says Mastrogiovanni, adding, “People are living longer and with more serious conditions, like diabetes and cardiovascular disease. It’s an issue that both plan sponsors and participants have to address. They can’t just ignore it.”
Communicating with participants and offering them access to resources for retirement planning are ways plan sponsors can help. “What plan sponsors need to do is make simple retirement tools available online for participants, tools that focus on factors that are specific to a person’s age and the point they are at in their career. Having these tools available is likely to prompt not only increased participation in a plan, but also encourage participants to up their contributions once they see how necessary it is,” says Mastrogiovanni.
Meetings with employees can help as well, he says, noting that the defined contribution world has really begun to focus on the issue of retiree health care costs. “Health care costs have really been a driver for employees to attend in-person meetings offered by the plan sponsor.”
Participants are also looking at tax issues related to health care costs, he says, which can affect plan design and options. He cites the example of one client who decided to switch from a traditional 401(k) to a Roth 401(k) because they found that, upon retirement, being in a traditional 401(k) would put them in a higher Medicare bracket. “Being in a Roth 401(k), they could pay taxes today and realize a savings of close to $200,000 in Medicare premiums,” explains Mastrogiovanni.
The paper mentions HealthView’s Retirement Health Care Cost Index as one example of helping to scale health care costs in retirement against the benchmark of expected Social Security benefits. Looking at Social Security, people expect those benefits to pay for so much in retirement, says Mastrogiovanni, especially when it comes to health care costs. The problem, he says, is that retirees are using a greater portion of the Social Security benefits every year to pay for health care costs.
“Participants need to be shown that health care costs are increasing at a faster rate than Social Security benefits. If they’re expecting that Social Security benefits alone are going to support them during retirement, they need to know that’s not going to happen. They need to look at what they’re putting into their 401(k) plan and increase their contributions accordingly,” says Mastrogiovanni. Plan sponsors should use a benchmark like HealthView’s index, as well as the simple online tools, to show participants specific numbers so that they will understand the important of saving enough for health care costs, he suggests. “It will be more motivation for them to take action."
The paper also discusses the idea of participants working during their retirement years, acknowledging that the idea has gained in popularity over the past few years.
“Almost three-quarters of Baby Boomers work or are planning to work during retirement in some capacity,” says Mastrogiovanni. “A larger percentage of people say that they want to work during retirement to stay active and participate.” He notes that doing so offers several advantages. First, it delays when people take their Social Security benefits, which results in a higher benefit amount when it finally is taken. Second, continuing to work means people can continue to use their employer-sponsored health care coverage, which is cheaper than paying for coverage on their own. In addition, retiring too early can affect whether a person is covered by Medicare, which does not kick in until age 65, Mastrogiovanni explains.
The more plan sponsors can help participants see the benefits of thinking about and planning for retiree health care costs, he says, “The more these same people can have peace of mind about it.”
Information about how to obtain a copy of the white paper can be found here.
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