Participants Need Knowledge of Retirement Health Care Costs

Advisers say it is good for participants to be informed of even harsh realities.

Retirement plan advisers are not refraining from addressing the high cost of health care in retirement with plan participants.

“We talk about all aspects of what they will need in retirement,” says Michael Woomer, senior vice president of institutional and retirement plan services at Fort Pitt Capital Group. “People basically understand that they will be facing health care costs, but they don’t understand how big the impact will be, so we tell participants how important it is to save as much as they can.”

While a recent report from the National Association of Government Defined Contribution Administrators estimates that a 65-year-old couple retiring today should expect to spend $220,000 on health care over the course of a 20-year retirement, Woomer says the costs could range from $150,000 to $400,000.

It is far more important for retirement plan advisers to discuss health care costs in retirement than it is to talk about lifestyle goals, says Mary McDougall, a Merrill Lynch financial adviser in St. Paul, Minnesota. The premiums and out-of-pocket expenses that retirees face range from $10,000 to $20,000 a year, she says. “The expenses are a lot more than they expected.”

“I would hope that advisers are not refraining from having this conversation,” says Scott Laue, a financial adviser with Savant Capital Management in Rockford, Illinois. “As a certified financial planner, we are required to disclose both the good and the bad.”

NEXT: Trend toward high deductible plans

The trend toward high deductible health care plans paired with health savings accounts (HSAs) is bringing the subject of health care costs—pre- and post-retirement—to the fore, says Shelby George, vice president, advisor services, at Manning & Napier in Rochester, New York. Just like the movement from pensions to defined contribution plans, employers are moving toward high deductible health care plans that put more of the onus on participants, and employers “are encouraging advisers to talk about it more in their education materials.”

Advisers are also increasingly encouraging participants to invest in HSAs. “This is one area that participants can use to save above and beyond the retirement plan,” Woomer says.

Even for the participants with more than $5 million in liquid assets that Frank Migliazzo, managing director, private wealth advisors at Merrill Lynch in Troy, Michigan, advises, health care costs are a concern. Migliazzo notes that Merrill Lynch research has found that over the last 30 years, health care costs have risen an average of six percentage points above inflation each year.

Merrill Lynch has also found that many people will end up in a nursing home, he notes. For a 65-year-old, there is a 15% chance they will need to be placed in a nursing home. At age 85, that rises to 55%, and at age 90, it increases to 70%. Migliazzo’s clients are also worried about dementia. As a result, many are buying long-term-care insurance.

The report from the National Association of Government Defined Contribution Administrators found that Medicare covers 62% of an individual’s health care costs, but the individual is responsible for the remaining 38%.

Laue says, “We are finding that if we don’t address health care costs in retirement—particularly for those who want to retire early before Medicare kicks in—we are not doing them a favor. There may be some advisers who don’t think about bringing it up because they assume government programs will take care of everyone, but they don’t. We think it is an important consideration.”