Retirees: Prepare to shell out $220K for health care

When it comes to financial planning, health care must be top of mind. Why? Because studies have concluded that health-care costs in retirement will be around $220,000.

It's for that reason financial advisors must not just look at the hard data. After all, saving, spending, investments, insurance and estate plans are relatively straightforward.

Historically, financial planners have used this hard data to make recommendations on what clients need to create financial security in the present and the future. However, we know intuitively there is more to the picture than the hard data that affects the outcomes for the client. One variable that can greatly affect a plan is the state of a client's health—and his or her attitude toward taking care of it.

Health care senior
Katrina Wittkamp | Getty Images

If health status affects a financial plan, how do we calculate this "soft" side of planning into the hard calculations? By understanding your client's health, financial plans can more accurately reflect the reality of their situation.

Health status and health-care usage mind-set affects areas such as retirement planning, insurance planning and estate planning. The key is to become comfortable with the conversation and learn how to incorporate it into your plans.

Get comfortable with the conversation

This is the first and most important step in health-care planning. If you are comfortable inquiring about health history and explaining why this needs to be discussed, clients will become comfortable sharing their health history with you.

Start with a basic open-ended statement: "Tell me what you do to take care of your health." Most clients will launch into everything you need to know. From this starting point, it is easy to fill in the important details.

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What will you do with the information they provide? The following are a few examples:

Longevity planning. What do you use for life expectancy? Some planners use age 100. Others use average life-expectancy tables. Do you plan the same for a 60-year-old healthy exercise enthusiast versus a 60-year-old client with brittle diabetes who smokes and names "12-ounce curls" as his exercise of choice?

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To me, an average life-expectancy table would be a big mistake for either client. You may have the healthy individual undersaving and the unhealthy individual oversaving and deferring enjoyment on a life they may never get to live.

For healthy clients, I use age 100. For clients with significant health issues or severely unhealthy lifestyles, I use a life-expectancy calculator based on health habits, such as

I once had a client with significant health issues insist he would die by age 72 and that he wanted to spend more money. This would have left his wife destitute. By using the calculator, I was able to show his average life expectancy was actually 84 years old, and he agreed to temper his desire and keep his spending realistic. As he now approaches age 72, he and his wife are very thankful we provided a more realistic estimate of his life expectancy.

Health-cost planning. How much do your clients really need for health-care costs in retirement? Fidelity states a person needs a lump sum of $220,000 to cover Medicare B and D and Medigap premiums and out-of-pocket expenses. The Employee Benefit Research Institute provides a range of numbers. Do you think you will be average when it comes to your health-care spending?

Status vs. mind-set

I would wager that the most significant determinants of health-care spending are health-care status and health-care mind-set. Health-care status is partially in a client's control, while health-care mind-set is totally determined by the client.

What is a health-care mind-set? We all have different attitudes about the medical system and how it should be utilized. Some people access the health-care system for every itch and ache that pops up. Others have to be dragged in by their toes even while having a major heart attack.

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Most people aren't so extreme, and in my experience, there does tend to be a trend that people can recognize within themselves. Why is this important? If you are a minimizer and access the health-care system rarely, your need for health-care savings is likely lower. If you are a maximizer and know you will go to every specialist available when a problem hits, your need for significant savings is higher.

By understanding your client's health-care mind-set, you can use the range of EBRI numbers to determine how much should be set aside for health-care costs. A maximizer could aim for the 90th percentile, while a healthy minimizer could aim to save toward the 10th percentile of health-care costs, or at least enough to cover Medicare B, Medigap and Medicare D premiums. The difference between these two numbers is $127,000, which is a pretty penny.

"By walking your clients through advance directives, you can help them have a better quality of life in their last days and save the family significant resources."

Long-term-care planning. Long-term-care expenses vary widely by region of the country and type of care delivered. One sorely under-addressed way to mitigate long-term-care expenses is to have great health-care planning in place.

At the end of life, once we know a quality of life acceptable to the patient is no longer going to occur, the large majority of people only want to be kept comfortable and allowed to die peacefully. Often, the opposite occurs: Everything is done to prolong life, regardless of the expense. This can result in destitution for the family left behind. What can be done to mitigate this?

Read MoreHealth is wealth for retirees

The answer is for people to have clear advance directives that are communicated to the entire family and health-care team long before end of life occurs. By walking your clients through advance directives, you can help them have a better quality of life in their last days and save the family significant resources.

What is next? We are in the infancy of incorporating health into financial planning. By making health a part of the planning conversation, advisors can open new territory in helping their clients prepare for a rewarding life.

—By Carolyn McClanahan, M.D., founder and director of financial planning at Life Planning Partners