While financial advisors have always struggled to find ways people can pay their bills after retirement, that estimation has become trickier with rising health care costs, not all of which will be covered by Medicare.
In early May, Fidelity Investments reported that a 65-year-old couple retiring in 2012 would need $240,000 to handle their medical costs through their golden years -- a 4% leap from last year, even after it takes into account savings from the 2010 health care reform package.
According to the Employee Benefit Research Institute, seniors' health care spending is the only type that increases as they age, and it's the second-largest component of their expenditures. It's about 10% of the budget for those between 50 and 64, but 20% of the budget for those over 85.
Putnam Investments has tried to tackle the problem of estimating expenditures by adding a new feature to its 401(k) retirement income calculator, one that allows pre-retirees to estimate health care costs in retirement. The company will be adding this feature to its Lifetime Income Analysis Tool in the fall of 2012.
The health care calculator, available to Putnam 401(k) plan sponsors, allows investors to enter different health characteristics into a battery of new data fields that itemizes medical, dental and pharmaceutical expenses for different client ages. Are the clients smokers? Do they have any chronic disease? Do they have high cholesterol or Type 2 diabetes? What state do they live in? With these assumptions and a few sliders, the calculator can help a retiree determine how much they will need to spend on health care as a percentage of total expenses. They can then use sliders to shift their contribution rates to their 401(k) plans up and down, or adjust for different retirement ages or different equity-bond allocations, rearranging the tiles in their retirement puzzle and seeing how to close income gaps.
A box at the top of the each screen shows you what happens as you slide through the data -- how much health care will encroach on your total overall expenditures, as well as show the gap in your funding to maintain a certain spending goal.
Some of the assumptions were as novel as the tool itself. According to Van Harlow, the director of research at the Putnam Institute, people with cancer or diabetes will ironically be spending less in retirement -- since the calculator has interpolated their lower estimated life spans.
According to a recent Putnam survey of some 4,000 workers ages 18 to 65 conducted in late November and December, 83% had no formal written plan for their households spelling out their retirement expenses. Of the 17% that did, only 71% of them factored in health care expenses. So only 12% of workers factored health care costs into their retirement, said Merl Baker, a principal at Brightwork Partners (which conducted the research for Putnam). Baker revealed the results at a Putnam Investments forum in New York on May 23.
According to Putnam Investments CEO Robert Reynolds, "Even as we focus on income replacement as the defining goal and high deferrals as the prime variable in reaching this goal, it is vital that we also begin to help working Americans understand what may be their largest expenditure in retirement and that is health-care expenses. The need to focus on retiree health-care costs is long overdue in the industry."
He said that health care costs over and above Medicare are one of the top concerns of baby boomers, and that workplace plan sponsors and financial advisors need to help people get a handle on these costs.