More Financial Advisors Helping Early Retirees Plan For Health Costs

(Dow Jones) More financial advisors are helping clients who want to retire early to prepare for the high cost of health care during the period before they turn 65 and become eligible for Medicare.

Part of that preparation is calculating the growing risk that a client's employer won't provide early retirement health care coverage as a benefit.

"If they're retiring early and don't have access to Medicare, that becomes a big issue," says Howard Cadwell, a financial advisor in Brentwood, New Hampshire. He says clients often find the analysis he provides of these and other health care costs "scary or discouraging," but if you don't raise it "you're not serving your client well."

The health care overhaul legislation approved in March is expected to make it easier for early retirees to get coverage, but those provisions don't go into effect until 2014. A government fund to help companies with coverage costs in the meantime is expected to be tapped out well before then.

Employer provided retiree health care insurance has been declining, but almost three in five of the 1,288 companies in consultant Hewitt Associates' SpecSummary database offered the benefit in 2009. The government is trying to encourage them to continue coverage to early retirees until 2014 by reimbursing self-insured businesses for some claims by retirees aged 55 to 64 and their families. The reimbursements are available for yearly claims that exceed $15,000 for an individual, up to a limit of $90,000.

The government has allocated $5 billion for the reimbursement program. More than three-quarters of the companies that offer these types of benefits plan to apply, according to a survey released Tuesday by Hewitt Associates. That means the money is "going to go pretty quickly," says Helen Darling, president of the National Business Group on Health, an association of large employers.

More companies are expected to drop retiree health, according to another survey released Tuesday by consulting firm Towers Watson. Looking at the expected impact of the health care bill, it found that almost 80% of the 650 mid- to senior-level benefit professionals surveyed say "there is likely to be either a moderate or significant decrease in the number of large employers offering employer-sponsored retiree medical benefits."

Almost 60% of the companies expect to reexamine the benefit, and 43% say they are likely to eliminate or reduce the coverage as a result of the health care overhaul.

Even those from ages 55 through 64 who are lucky enough to have employer-provided insurance should expect to pay about $10,000 a year in out-of-pocket expenses, according to Hewitt Associates. And expenses for retirees must be paid with after-tax dollars because individuals no longer have access to pre-tax arrangements like flexible spending accounts.

One reason for the high price tag is that this group of individuals is "disproportionately unhealthy" because of its age and because some were forced to leave the workforce early because of health problems, says David Armes - a financial planner in Long Beach, Calif. - who often helps other advisors with client Medicare decisions.

Cadwell says he wants clients to be ready no matter what the impact of the health care legislation because a healthy couple retiring at 65 in 2010 needs to be prepared to spend more than $200,000 in out-of-pocket expenses over the rest of their lives, even with Medicare.

Cadwell tries to make the discussion with clients about these costs less intimidating by "dovetailing the analysis with retirement budgeting, real estate planning and long term care planning."

Craig Larsen, a financial advisor in St. Charles, Illinois, likes to discuss the subject with clients as soon as possible, preferably during the first meeting. "If you don't plan for your potential health care costs when you're 22, 42, 62, it could really cause significant hardship later," he says.