Invest your way into health-care security

  • You can't possibly know what health care will look like in retirement, so prepare for the worst.
  • The health savings account is "like a secret IRA" with huge tax advantages for those that qualify.
  • Look toward your family history and inheritance goals to determine your long-term care needs.
Examination
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Health care has become one of the biggest — and most costly — unknowns during retirement. Financial advisors say ignore what you don't know and prepare for the worst.

The health-care debate in the United States has turned into a jumble of ideas. Some want to go back to a system similar to the one we had prior to the Affordable Care Act, others want to fix the issues in the current system, while still others want single-payer. While compromise feels unlikely at this point, it leaves a huge question for savers: What will health care look like when I retire? For that, there's no clear answer.

And it's a problem. As Washington debates, the cost of health care continues its precipitous climb. According to an estimate developed by the brokerage firm Fidelity, a couple retiring at age 65 can expect to spend $275,000 during retirement on medical expenses. It's a 6 percent increase from 2016 estimates, and that doesn't include covering certain health-related expenses, such as the cost of a nursing home.

There seems to be no end to this health-care rise, and it only fuels more speculation of how the system could change when you're ready to actually tap the funds. All these unknowns make it difficult to plan, apart from saving as much as possible.

"Health coverage is going to look different in 20 or 30 years," said Eric Dostal, a certified financial planner and advisor at Sontag Advisory. But Dostal added that, for planning purposes, it doesn't matter what Washington is discussing as potential options for changing health care. Instead, he suggests you "plan for what you know today."

Take advantage of an HSA

When clients ask advisor Phillip Christenson about health-care planning, he admits he has no idea how health care will look when they're ready to tap funds. Therefore, he runs a few different scenarios, analyzing how much they will need if health-care costs inflate by 10 percent or 15 percent or more. "There's no real answer, since we don't know what's going to happen in the future," said Christenson, who co-founded Phillip James Financial.

If the clients need more savings, he will see if they qualify for a health savings account.

"The HSA is not only a huge benefit for medical costs, but it's also like a secret IRA," Christenson added.

According to the American Health Insurance Plans, the rate of HSA use has risen to 20.2 million last year, up from 3.2 million in 2006. It has become a popular tactic to earmark some retirement savings specifically for health care, since you can carry over the balance if you don't use the funds for health-related costs.

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Contributions to the HSA are tax-free, and there's a $6,750 limit for families. The earnings also grow tax-free and, if you use the funds for qualifying medical expenses, then the entire distribution circumvents the IRS.

"If it's available to you, take advantage as much as possible, and try not to use it for health-care costs while working," said Dostal at Sontag Advisory.

But not everyone qualifies. You have to enroll in a high-deductible — $2,600 for a family — health-care plan. Dostal is such a big supporter of the tool that, while his wife and kids are insured through her employer-provided health plan, he himself is enrolled in a separate, high-deductible plan so he can save through an HSA.

Check your work options

While the number of employers that offer health coverage to their retirees has dropped — to fewer than 25 percent today, down from 66 percent in 1988, according to the Kaiser Family Foundation — it's worth a look to see if your company offers such coverage prior to retiring.

Often these plans last for at least a couple of years after retirement and they can protect new-retirees' savings from a surprise health-care cost.

"It's a good thing to get on," said Christenson of Phillip James Financial. "You'll know your costs, and it can also be subsidized by the employer."

Watch out for long-term care

As insurance companies have cut back the length of coverage and increased the cost of long-term care insurance, advisors have found cheaper, more reliable tools to cover nursing care, such as saving more in a regular IRA.

"People that need [long-term care insurance] can't afford it, and those that can afford it, don't need it," said Sontag Advisory's Dostal.

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But the average person will stay in an assisted living facility for over two years, with an average monthly cost of a private room in such a facility more than $8,000, which varies widely by state.

If there's fear that a family member could spend a number of years in nursing care, then long-term care insurance becomes more attractive. Dostal determines the need for long-term care depending on the individual client's history. He'll ask them a series of family health questions, such as whether Alzheimer's is prevalent in the family, to see if they, in fact, expect to have a long-term stay in a nursing home. He'll also weigh whether the client wants to leave a significant inheritance. It's easier to save for nursing care if you're not worried about passing along a legacy to your children or grandchildren.

Whatever a client chooses, it's an educated guess more than a guarantee. And that won't change until health care's complexity is solved.

— By Ryan Derousseau, special to CNBC.com

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