Aside from another market crash, health-care costs are perhaps the greatest threat to a secure retirement. Most Americans rely on some sort of employer-subsidized health insurance. When they reach age 65, they typically rely on Medicare and/or supplemental insurance. In the past, some had access to employer-sponsored health benefits, but that type of benefit is becoming increasingly rare. The net result is that more Americans than ever are going to be relying on Medicare at a time when the system's ability to pay its bills is in jeopardy.
Over the next 20 years, it is estimated that 10,000 people per day will enter the Medicare system as they turn 65. As financial advisors are well aware, Medicare is not free. There are premiums to be paid, coverage gaps, co-pays and other out-of-pocket expenses that can have a significant impact on retirees' financial health. In addition, it is clear to most observers that with the coming increase in Medicare subscribers, the current system is unsustainable. In the future, they will likely see reduced benefits, increased costs or a combination of the two.
Unfortunately, most Americans are woefully unqualified to analyze their Medicare options. Small minorities of advisors are well schooled in the Medicare system, but many are not.
One firm that wants to help advisors help their clients better estimate their health-care costs in retirement is HealthView Services (HVS). According to the firm's Web site, "HealthView Services is one of the few firms in the country that builds solutions for both the health-care and financial services industries to address out-of-pocket health-care costs that individuals will face during retirement."
The firm's management team has experience in both the financial services and health-care industries. President and CEO Ron Mastrogiovanni co-founded FundQuest, a provider of wealth management solutions to financial institutions (the firm was later acquired by BNP Paribas). And HVS board member Charlie Backer has more than 25 years of experience in health care, public policy and the health insurance industry. He is a former CEO of Harvard Pilgrim Health Care, a $2 billion, 1 million-member health benefits plan.
I recently spoke with Dan McGrath, HealthView Services' director of health-care funding strategies. McGrath formerly served as a vice president of regional sales for FundQuest. According to McGrath, "In most financial plans produced by advisors today, no information is being given about health-care costs. In most financial planning software, health-care costs represent a single line item that the advisor is expected to fill in, but nobody is actually calculating the numbers."
His firm's software, RetireMark, calculates estimated health-care costs by relying on actuarial data. The cost estimates are tailored to the individual client according to his or her specific physical condition.
To date, HVS has primarily been offering white label services to institutional clients (McGrath mentions names such as Merrill Lynch, Putnam and Nationwide). But he hopes to market RetireMark to independent financial service professionals. "The Medicare rules are convoluted," he says.
As a result, you get advisors gravitating to both ends of the spectrum. The minority of advisors who are knowledgeable about Medicare are perhaps spending too much time performing the analysis for their clients. Other advisors are not getting involved at all. HVS created RetireMark so that professionals of both temperaments can quickly and easily get a handle on their clients' likely expenses. The software can also help analyze long-term-care costs.
I recently took RetireMark for a test drive. At login, I elected to create a report covering both health care and long-term-care costs. I created an analysis for a fictional couple, "John and Sally Smith."
After you enter a name, you are asked to answer a general health questionnaire, either a simple one or a more detailed one. The simple version asks only for the client's gender, current age and general health, on a scale of 1 to 5. First, I used the simple questionnaire. I set the age of both clients at 55 and gave them an "average" health score of 3. When I moved to the next screen, the application calculated that "John" was expected to live to age 87 and "Sally" to age 89. All subsequent calculations flow from these estimated life spans.
With the more detailed questionnaire, you are asked more specific things about the retiree's condition-whether he or she has high blood pressure, high cholesterol, diabetes or cardiovascular disease, whether he or she exercises or uses tobacco, etc. I gave John high blood pressure and made Sally a tobacco user. Neither exercised regularly, and neither ate a particularly healthy diet. The program calculated a life expectancy of 86 years for John and 83 for Sally.
It seemed clear that by answering just a few simple questions, you could get a more accurate reading on the estimated average longevity of your clients. But when in doubt, erring on the side of greater longevity is probably the way to go. (McGrath says HVS developed an even longer, more detailed questionnaire, but test clients were uncomfortable with some of the questions and the longer form was dropped.)
Once you have established the longevity you are comfortable planning for, you go to the "Retirement Planning" screen, which requires a few inputs. First, you are asked whether you want the calculations based on a national average or on a specific state. You are then prompted for the clients' estimated retirement income, which will affect their premiums for Medicare Parts B and D. I used the national average costs and estimated that Sally and John had income of less than $170,000 and both retired at age 65. I requested the output in today's dollars. I was then required to select the types of premiums the two would be paying. I went for all of the choices available: Medicare Parts A and B, Part D, Medigap and dental insurance. The application calculated that the Smiths' premiums in the year of retirement (2022) would total, on average, $4,975 per person. A user can also see how the cost is projected to increase in five-year increments-so costs for 2042 would be projected at $11,606 per person. Using this particular example, the total costs during the life expectancy of both John and Sally would be $609,510.
Using the national average as a baseline, we can compare the couple's yearly and total costs with those in a particular state by simply choosing the state from the drop-down list. Running our calculation for Florida, we see that the projected cost, per person, in 2022 is estimated to be $5,280. The cumulative lifetime expenses are projected at $643,710; that's $34,200 over the national average. On the other hand, if John and Sally decide to retire in Hawaii instead, the cost per person in 2022 is estimated to be $4,234, and the cumulative lifetime cost is estimated to be $507,260. That's $136,450 less than Florida and $102,250 less than the national average.
We know that these projections are just estimates, and we know that these calculations are not the only factor determining where someone should retire, but we think many clients would appreciate this sort of analysis.
For a more complete picture of health-care costs, you might want to add in out-of-pocket expenses for hospitals, doctors and tests; for prescription drugs; for hearing and vision costs; and for dental costs. Just check off the appropriate boxes, and the application will estimate these costs too. If we add all of those costs to the previous example, using the national averages, that would increase the annual cost per partner by $1,295. The corresponding estimates for Florida and Hawaii are $1,243 and $1,173 respectively.