Don't Neglect Health Care in Your Retirement Planning

Occasionally, our firm gives presentations about retirement planning, and the topics can be somewhat predictable. How to grow your investments. The best ways of distribution. Social Security. Dealing with taxes. Managing risk.

But what about health care?

Sometimes, it seems like the forgotten topic. Many people put it off. They don’t want to talk about it or think about it. They don’t understand the impact of health care on their retirement income. Yet it’s hugely important.

You could have the best income plan in the world. You could have accounted for inflation. You could have considered all the risk factors. You could be set up with great income coming to you each month. It all might look perfect. But if a health care crisis happens — or worse, if you didn’t plan for the cost of health care or the potential of needing long-term care — the best income plan could suddenly become insufficient.

Do you have $260,000 for health care?

According to Fidelity Investments, the average American couple will need $260,000 to cover out-of-pocket health care expenses during retirement. That’s up 6% from the previous year. And it doesn’t even account for any long-term care expenses.

Sometimes I refer to health care as the “great white shark’’ of retirement income. You think you’re fine, but medical expenses swoop in out of the blue and gobble everything up. In planning for retirement, people may consider their Social Security, their pension, their annuity and their investments; then they will factor in expenses. They may think, “Hey, I’m good to go,” even as they fail to consider those potential health care costs.

Even if it’s the traditional Medicare coverage, you need a general idea of the monthly costs to cover the premiums, co-pays and out-of-pocket prescription costs. I have several clients who have prescription costs of a few thousand dollars every month.

What about long-term care?

Then you must consider long-term care, which is a different animal altogether. Studies say anywhere from 1 in 3 to even half of us, will need some form of long-term care, whether it’s a full-service nursing home, adult day care, assisted living or home health care. These are sticker-shock numbers. In Florida, where our firm is located, a semi-private room in a nursing home runs $7,500 per month. It’s even higher in other locations. That’s not even for a private room or advanced nursing care. On average, home health care is $4,500 per month.

See the issues here? And remember, this is in addition to the $260,000 a couple would need for typical health care costs in retirement.

How do you plan for this? There’s the rub. It’s kind of a moving target and you’re not sure exactly what level of planning is needed. But awareness and communication are big steps toward finding a solution. Here are some ideas to consider:

Any financial adviser or retirement counselor worth their salt should take health care costs into consideration. But automatically, they often will focus on other things, such as retirement planning, wealth management, taxes and creating income streams. So you might need to be the one to open this dialogue. If the information is not being conveyed, you should ask questions and get it on the table.

I’ve observed financial advisers either avoiding the health care issue altogether or going straight to insurance as kind of an all-purpose fix-it tool. When you meet with your financial or retirement adviser, you should say, “Let’s talk about health care and how that’s going to affect my retirement income plan.” You need to explore all options in the system and make it work for you.

I would also suggest — and this is very important — that you work with financial advisers and attorneys who deal with these issues on a regular basis. They will know creative planning techniques. They may know how to qualify for all forms of aid if the need arises and how to start planning for that right now.

Get the family involved.

Even more than your financial and retirement advisers, it’s important to talk openly and freely with your loved ones. It’s a very emotional time; not so much in the planning stages, but when the health need actually occurs. That’s when you’ll be grateful that planning was done.

You have to address what will happen if there’s a health issue. We’re all going to die, and up to 50% of us may require some long-term care. Our families need to know what to do in those situations. They need to know we’ve planned for it. It’s not a very comfortable conversation, but it’s a healthy thing to do and everyone is better for it.

Some people say, “Oh, my kids will take care of me.” Well, sometimes the kids are working, and they can’t take care of you.

Explore your options.

An obvious option is to buy long-term care insurance, but that can be expensive. People are hesitant because they aren’t sure if it will even be needed. But there’s a good chance long-term care insurance will be needed. Sometimes, you might just need enough insurance to offset part of the cost.

There are other possibilities, though:

You could consider asset-based long-term care insurance plans, where the premiums are leveled and don’t rise as steeply. There are some that are like life insurance, where you fund them and there’s a cash value. They have a long-term care benefit as well as a death benefit, so someone will ultimately get the money.

You can also do Medicaid planning. Remember: Medicare doesn’t pay for long-term care, but if you have spent down your assets enough, you could qualify for Medicaid, which does. Medicaid planning helps position you in a way that allows you to qualify for Medicaid, but your spouse can retain assets. The asset would need to be converted to an immediate annuity payout and income would need to be level (not increasing) and be received over the person’s lifetime. Moreover, the state Medicaid program would need to be the primary beneficiary, so they would be receiving the payments. At this point, the individual would be able to keep the asset, as the income is what is being recognized by Medicaid. Caveat: Some states don’t allow or have attempted to block the use of these annuities, so be sure to check with your adviser and your attorney (they should be working together on this for you) to make sure your state allows this planning.

There’s also a way to set up your IRA, where it’s paid out on a monthly basis to a tax-compliant Medicaid payout schedule. So, the IRA is treated as an income stream and no longer counts as an asset when qualifying for Medicaid. The person might look poor on paper in assets, but they have two income streams, the Social Security and IRA checks, and that’s where the government will look.

The point is you have options, especially when you give them thoughtful consideration and use your years of planning in the right way. Don’t procrastinate.

You can’t see a tornado coming. It’s violent and strikes quickly. But you know a hurricane is coming. It could be 1,000 miles away, and you have plenty of time to prepare. It’s a matter of whether you take it seriously and actually plan. It could miss you completely, but do you want to take that chance?

Retirement planning can be the same way when it comes to health care. You’re going to be sorry if you haven’t prepared. The health care issue is out there. We can all see it. With the proper preparation, you can reduce the odds of your hard-earned economic house being destroyed.

Joey Johnston contributed to this article.