These days, retirement planning isn't complete without a healthy dose of health-care planning. The reason is twofold: Health-care costs are rising at a faster clip than inflation, and, at the same time, people are living longer and relying on prescriptions and therapeutic treatments for more years than ever before.
That said, how are financial advisors addressing this issue? What exactly are they recommending to their clients?
The answers are as widely varied and eclectic as the clients themselves. "Health-care planning is becoming a more significant part of retirement planning, and an area that needs to be addressed," contends Ginger Snyder, a financial planner and senior vice president at Raymond James' 360 Wealth Management Group in Tampa, Fla. "Because of the increasing costs and possible longevity of retirement, establishing a 'bucket' of money for health-care expenses must be part of the planning picture."
Health-Care Savings
How big a bucket is enough? Quantifying a client's health-care risk isn't easy. "The costs are inestimable, and therefore you need to overinflate the amount needed for health care," says Michael Kay, a certified financial planner in Livingston, N.J., and author of The Business of Life. "Planners cannot use historic inflation rates when it comes to health care. Being ultraconservative is necessary to make sure there are sufficient resources to meet potential needs."
One recommended way to save is through a health savings account, available to anyone with a high-deductible insurance plan. HSAs allow "an individual to save money in a tax-advantaged account to offset medical expenses as they occur or to accumulate a balance [for] medical expenses in retirement," says Steve Dillman, a certified employee benefit specialist at CBIZ Employee Services in Columbia, Md. "Given the fact that fewer and fewer employers are offering any type of postretirement medical benefits, it's imperative that people begin accumulating savings to cover these costs."
Beyond Saving Extra Money
But others point out there's more to health-care planning than furnishing adequate funds. There's a lot of necessary paperwork, for one thing.
"Documentation is often out of date, nonexistent or flawed," says Judith McGee, the CEO and chair of McGee Financial Strategies, a Portland, Ore.-based independent registered investment advisor. "For example, someone may have a health-care power of attorney in place and not have access to medical records because he or she doesn't have a HIPAA release," McGee says, referring to the Health Insurance Portability and Accountability Act of 1996, which governs the security and privacy of health data. "Simple details need to be reviewed to conform to current laws."
Keeping up with current laws, however, is just one part of preparing for the unexpected. That's a key difference between health-care planning and more general retirement or estate planning-health issues can arise suddenly, at any time. "We often go through what-if scenarios with our clients-best case/worst case scenarios-to help them make decisions in advance, no matter what their stage of life or circumstances," McGee says.
In the past few months alone, she says, one client casually revealed having a brain tumor that needed surgery, another received a diagnosis of Parkinson's disease and ended up having to retire early, and a third suffered a recurrence of leukemia and is now on a transplant list because his blood cells no longer respond to normal treatments. "Life happens, and so often in such a short period of time," McGee says. "Planners need to be both empathetic and practical."
Insurance Limitations
One common fallacy is that if you have insurance you're all set. First, major medical doesn't cover long-term care. Second, insurance carriers are increasingly pushing preventative medicine as a cost-saving measure-and perhaps advisors should, too. "There is clear evidence that over 70% of chronic illness is lifestyle-related," says CBIZ's Dillman. He cites diet, smoking, drinking and exercise as health-affecting behaviors. "Employers are beginning to take the position that they will not continue to pay for their employees' and dependents' bad choices."