EBRI’s CEO, Dallas Salisbury, predicts Medicare benefits eventually will be cut. He also states that most Americans believe Medicare already pays for more than it actually does, potentially setting them up for a financial disaster in retirement.

·         Do you agree with his assessment on the future of Medicare?

·         Before you get into the subject with clients, do they have a realistic understanding of what they’ll be paying for health care when they retire?

·         Do you try to project your clients’ health care expenses in retirement in terms of an amount of capital they’ll need at the beginning of their retirement to cover those expenses for the rest of their lives?

·         What approaches do you take to help your clients prepare for those expenses?

Discuss it here with your colleagues.

I'm always hestitant to accept large numbers for something as undefineable as medical care.  I find such a number a scare tactic.  Sometimes it urges people to act; other times it simply causes them to throw up their hands.  The $64,000 estimate is quite low in general; I've heard numbers in the $250,000 range from Fidelity.  I never attempt to have someone save for health care like one would save for college or retirement supplementary income.

What I do is work with the customer to estimate what they typically will pay out of pocket annually for health care.  I look at the cost of Medicare Part B, plus a medicare supplemental policy in their locale.  Then I add it some kind of drug coverage if it is not in the supplement.  Then I add co-payments and OTC drugs.  In that way they can see what they might pay once 65 or older and can contrast it with what they pay while working.  For many people it is actually a cost savings as many employers don't pick up that much of the cost.  As an example the cost of a family plan today is in the $14,000 a year range, while the costs for a couple on Medicare as I describe run $5000 - $6000 a year.   That can best be managed as part of one's expenses each year.

Medical coverage is part of the MUSTs in a budget.  So we put it there.  It isn't optional.  As for LTC, there is a point when insurance costs too much so one must take the risk.  If the cost of the insurance is that burdensome, then there probably aren't enough assets to be protecting and spending them down is in order.   Eventually the Medicaid program comes into play.  For many people that is the right choice.  For those in some mid-range, insurance is the answer.  Above that point, if one could afford the approximate $100k for a nursing home or home health care services at home, self-insurance is the best choice.

I can't imagine someone saving for their health care needs any more than I can imagine someone saving for the contingency of their house burning down.  I can plan to pay for insurance.  I cannot plan for the absolute unknown. I would have a hard time even crafting reasonable assumptions to base the plan on.

 Hi John,

I can understand your frustration around this topic.  I work mostly with retirees so the reality of high health care costs is always in the planning conversation.  When I work with younger clients, I begin with a discussion of people they may be aware of who are dealing with these costs (parents/grandparents/anyone that has a big health care issue - it would be the rare person who can't identify someone they know dealing with a medical issue and a medical cost issue), then I suggest that to prepare for the probability of health care needs and generally high cost (college is actually still a choice, if you need medical care, most likely you're going to use it) they will want to save an additional 2% on top of whatever they're saving for retirement (my preferred rate here would be 15%) from a relatively early age.  That figure comes from a study Hewitt Associates did several years ago that indicated by doing so, workers could achieve a higher percentage of their pre-retirement impact and mute the hit from health care at least to the degree it would derail their retirement plans. 

There is also a better tool to do that saving now in HSAs which can be managed for the client and if their spouse is the beneficiary can become the spouse's HSA on death or a taxable (FMV) asset to a non-spouse beneficiary.

I think the benefits of saving for health care as a goal may become more evident as HSAs grow, the current wave of retirees shares their experiences and if government assistance gets cut back more.  This probably sounds corny, but the other things I include in my presentations around this topic is the idea of controlling or influencing what we can.  I decide what I will eat, how much I'll rest and exercise, what my recreational habits will be, etc.  All these contribute to what my out of pocket health care cost will be and they're within my control when so many things are not.  Doesn't mean I can't get hit by a bus or get sick, but it seems like a reasonable approach to take towards restraining health care costs.  Clients can do this too.

Thanks again for your discussion comment - I have felt at times as you do.