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.
Once you've arrived at your projected expenses, the application allows you to calculate a plan to cover the expenses in three phases. Using the Hawaii example with all expenses, the cumulative health-care expenses for Medicare and all out-of-pocket expenses are estimated at $643,430. If we assume that we fund the expenses today, the program estimates the cost in today's dollars to be $209,104.08. It assumes that we can earn 6% on the money until retirement, 5% between the ages of 65 and 74, and 4% for the remainder of the planning period. These rates of return can be altered as desired.
You can also enter pension and Social Security payments, and run scenarios that assume a portion of your payments would be used to fund health-care costs during retirement. Currently, the application does not calculate Social Security benefits for clients. It provides a link to the Social Security Web site where benefits estimates can be accessed.
Again, you can perform a long-term-care analysis as well. If you do, you check the box next to the partner (or partners) you want to perform the analysis for. You are also prompted to enter a state and a period of care. The application supplies a default care setting (assuming the long-term care requires the help of a skilled nurse) and a default metro region (with a state average), both of which can be modified. If you are not sure how long the care would last, or what the odds are the client will need it, you can click the research button. In my sample case, I saw that the odds of John needing long-term care at age 83 was about 35%, but if he lived to age 89 or beyond, the odds went to over 40% and peaked at about 45%. Also, if John needed assisted living at age 62, the length of his stay would average 2.5 years. At age 83, that drops to about 1.88 years. If John needed skilled nursing care at age 62, the average projected stay would be 1.93 years, but that would drop to 1.26 years by age 70. The application can also generate the estimated annual costs in today's dollars, assuming that the care is needed near the end of the client's life expectancy.
Armed with this information, and the relative costs associated with the various options, the advisor is much better prepared to discuss LTC options with clients.
When all the information is entered to the advisor's liking, a report can be generated in PDF format. The report I generated, which did not include the Social Security and pension analysis, ran about six pages. It included all of the assumptions entered, a year-by-year chart of the cash flows, a pie chart of where the money was projected to be spent by each person by category, the average expected annual expenses per five-year time period, a glossary and disclaimers. The report looks professional, and it should be clear enough for clients to understand.