By David L. Cumming
Longer life spans and rising health care costs are driving investors to control their financial exposure to uncovered bouts of care—particularly in retirement.
The United States spends more than $3 trillion a year on health care, or nearly $10,000 per person. Overall spending rose 5.8 percent in 2015, faster than the pace of inflation or wage growth.
Systemic efforts to rein in costs have met with some success. Consolidated hospital networks are better positioned to deliver treatment at scale and pass savings onto patients and insurers, and an increasing focus on preventative care aims to address medical issues before they snowball into chronic and costly conditions.
Still, another trend in the changing health care system—patients shouldering a larger share of treatment costs—is driving up out-of-pocket expenses. The elderly, who require the most care, often bear the brunt of the costs.
It is important to take steps to minimize your financial exposure to uncovered medical costs. But whereas your incentives for saving for retirement are easy to digest—to be able to afford a desired lifestyle after your working years—planning for the less palatable aspects of old age can be more challenging.
Planning for the future
It is estimated that 70 percent of people turning age 65 can expect to use some form of long-term care during their lives. One year in a private room in a nursing home care costs $105,645 today and is projected to reach $245,649 in 20 years. Even with a robust portfolio, you may have trouble handling such large costs.
Many adults nearing retirement age are concerned about health care costs but unsure how to budget for them. A 2016 survey by the Nationwide Retirement Institute found that four out of five people cannot estimate how much they will have to pay for health care in retirement, even though nearly three-fourths say out-of-control health care costs are one of their top retirement fears.
Those fears are warranted. Kevin McGarry, director of the Nationwide Retirement Institute, says the average retired couple now spends about $15,000 a year on health care, of which more than half goes to Medicare premiums, and they will spend somewhere between $259,000 and $395,0005 over the course of their retirement, depending on their lifespan and health conditions.
Should they encounter serious medical trouble, the costs will be even higher. Many Americans aren’t even aware of the uninsured costs they may face in these cases. A stroke, for example, may prevent a person from moving the right side of his or her body. That means expensive 24-hour assistance.
Medicare Part A covers skilled nursing care provided in a skilled nursing facility for a limited time, but only after a qualified hospitalization. However, Medicare will not pay for nursing homes when custodial care is the only care needed or care for conditions such as Alzheimer’s. Patients suffering from Alzheimer’s or other cognitive ailments may live for many years, all the while requiring assistance and, as the disease worsens, expensive hands-on care.
Protection for retirement savings
By the time people reach their 30s they tend to have a pretty good idea of the lifestyle they want to pursue, including in retirement, says Nationwide’s McGarry. There are a number of ways to save for retirement with your future health care needs in mind.
Investors in their 30s or early 40s, he says, may weight their retirement-funding strategies toward a portfolio of mutual funds or a managed-account solution, to provide upside exposure to the market. Given lower premiums for younger policyholders, long-term care (LTC) insurance should also be a consideration, he said.
These days, only a handful of insurers offer LTC insurance, so another option may be life insurance with an LTC rider, which allows families to tap into the benefits they would receive upon the policyholder’s death while he or she is alive and requires care.
Another option for funding long-term care expenses is to withdraw or borrow money from life insurance policies, or withdraw funds from or annuitize annuities. Note that either of these options would probably fall short of covering costs if someone needs care for many years.
McGarry says younger investors seeking less risk may want to couple mutual fund portfolios with some annuity exposure. Investors within 10 years of retirement may lean their portfolios toward variable annuities that offer market upside potential until retirement, and then guaranteed income.
Paying for unexpected costs
A final consideration is what to do when you’re faced with a large unexpected medical bill today. One answer may be a securities based loan, which may be available to qualified Morgan Stanley clients. When faced with a large healthcare expense, investors often liquidate financial assets to cover liabilities. However, this strategy may have unintended costs, such as tax consequences, potential loss of future growth or an imbalance in your portfolio’s asset allocation.
Once approved, a securities based loan may allow you to gain quick access to funds for a variety of needs while providing the opportunity to leave your portfolio intact and the strategy unchanged.
Protect your assets and your health
As health care costs continue to rise, it’s important to understand all of the options you have to protect the assets you’ve spent a lifetime accumulating.
Cumming is a senior vice president and financial advisor with Morgan Stanley.