Careful planning can ease retirement's health costs

The potential health-care costs during retirement can seem pretty daunting, but don't despair.

According to a Fidelity Investments study, a 65-year-old couple in 2014 would have needed $220,000 to cover health-care costs during the course of their retirement, not including skilled nursing care.

The average cost for nursing-home care is about $81,000 per year, with an average nursing home stay of 2.6 years for a typical female elderly patient and 2.3 years for a male, according to a report from the American Council of Life Insurers.

"I don't think it's as dire as some people try to make it out to be, especially on the health-care side of it," said Helen K. Simon, a certified financial planner and chief executive of Personal Business Management Services. "If you're logical about it and look at your numbers and do your homework, there's an answer."

Unlike long-term-care insurance, medical insurance expenses during retirement are a relatively straightforward calculation consisting of three main elements (not covered by the free Medicare Part A):

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• Premiums for Medicare Part B
• Medicare supplement premiums or, if not purchased, Medicare co-pays
• Medicare Part D (prescription drug coverage) premiums and co-pays

"People don't normally have a concept of these costs, unless if they've experienced a parent who needed care," said Shane Yonston, a CFP and founder and principal advisor of Impact Investors.

Spread out over about 20 years, it isn't that much money, according to Simon of Personal Business Management Services.

"They may currently be paying a similar amount, and some will have better coverage [under Medicare] than they have now," she said.

The pre-Medicare retirement years can be trickier.

"The advent of the Affordable Care Act adds some complexity to planning for those under 65," Impact Investors' Yonston said. "In navigating for insurance planning, we need to be aware of how investment income will impact a client's eligibility for premium subsidies."

Health-care planning should be more than financial, said J. Michael Salley, wealth manager and president and chief executive of Salley Wealth Advisors Group.

"Financial advisors should talk to clients about wellness initiatives, counsel them and make sure they have access to a wellness program," he said.

"Look to the local Y's, churches [and] local clinics," Salley added. "Clients want to know that you care."

The other big conversation is LTC insurance.

"It's a tough one for people to stomach," said Yonston at Impact Investors. "It's expensive, and they may never use it."

"But if you don't have it, your spouse and children will have to worry about it," he said.

What is the financial risk of not getting LTC insurance?

Yonston provides some hypothetical numbers for a 60-year-old Californian planning ahead for assisted living.

If the cost is now $225 per day, with 6 percent inflation it will be $721 per day in 20 years. A two-year stay would cost $520,000.

Clients who wish to self-insure would need at least $3 million, Yonston said.

There are many other considerations beyond the financial, said Salley at Salley Wealth Advisors Group. He said he asks his clients to think about:

• Where will you live?
• How much care will you need?
• Who will provide it?
• Where will you receive it?
• Who will pay for it?
• Do you have a health-care proxy in place?

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"There needs to be a discussion to see if all the children are on the same page," Salley said.

At Personal Business Management Services, Simon often advises her clients to consider continuing-care retirement communities, especially those associated with universities, which include various levels of care on one campus.

"This option could provide financial outflow stability because you could possibly buy a contract," she said.

"The market has changed dramatically," said Gary Smith, owner of New England Retirement Advisors. "It used to be fairly easy to plan for LTC in the '80s and '90s, when the requirements were not as stringent and the premiums were one-third the cost of today."

New products have appeared in response to these rising costs, particularly annuities.

"With annuities, generally the purpose is to guarantee future income to guard against longevity, risk and other factors, said Gregory Dillon, partner at Atlas Advisory Group. "But we want to make sure clients have adequate liquidity outside the annuity in the event of a catastrophic health event or any other unplanned expense."

Dillon is also a CFP and holds the "certified in long-term-care" designation.

New solutions include:

1. Combination life insurance/LTC policies: Clients put in a lump sum, generally between $50,000 and $200,000, based on age and health. Immediately, four or five times that amount is available for current and future LTC needs. An inflation rider can be added to the policy.

"People have migrated to these because of large increases in premiums in traditional long-term-care policies," said Dillon. "It's all about leverage." For his part, Smith at New England Retirement Advisors said to be sure to get an inflation rider.

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2. Deferred income annuities, which are also tax-deferred: "Clients may defer an income stream until age 70, when [individual retirement account] distributions kick in," Salley at Salley Wealth Advisors Group said. "This strategy may allow you to accumulate enough to cover your long-term-care expenses. You need to use both qualifying and nonqualifying funds."

3. Medicaid-compliant annuities: "The state must be a beneficiary, along with other contingencies, and you must work with an elder-care attorney to prepare this," New England Retirement Advisors' Smith said. "A lot of clients don't know what to do about long-term-care planning.

"There's no easy answer to this dilemma," he added. "Everyone needs it, but they don't become educated until the costs become prohibitive."