A number to avoid when discussing health care costs with clients
As advisors struggle to help clients assess health care costs in retirement, Vanguard offers them a bit of advice: Frame the number as an annual expense rather than a lifetime lump sum. It’s less daunting and more precise, the investment management company says in a new report.
Vanguard teamed up with Mercer Health and Benefits to develop a new model for estimating retirees’ health care costs that digresses from the standard ballpark estimates that it says academics and industry experts have batted around for at least a decade.
These lifetime lump-sum projections are “behaviorally distracting” and “demotivating for investors,” Vanguard says.
The Employee Benefit Research Institute estimated, for example, that a 65-year-old couple needs $265,000 to cover health care premiums and out-of-pocket health care costs, while the Boston College Center for Retirement estimated the amount to be $197,000. Their estimates do not factor in any long-term care expenses.
Vanguard urges planners to steer away from these “large dollar values” and present health care costs as annual expenses tailored to their clients’ individual circumstances. Its proprietary model, developed in partnership with Mercer, factors a person’s health status, location, retirement age, coverage choices, loss of any employer health insurance subsidies and other variables into their cost projections.
A medium-risk 65-year-old woman living in a median-cost area, using only traditional Medicare and Part D prescription drug coverage, for example, could expect to pay between $3,200 and $6,600 for premiums and out-of-pocket medical, dental and vision costs in 2018, according to the Vanguard-Mercer forecasting model. If, however, she were high-risk, meaning she suffered from two or more chronic conditions, her costs could range from $3,500 to $21,000, with a median payout of $7,600.
Vanguard also encourages planners to keep annual health insurance premiums and out-of-pocket expenses separate from long-term care expenses, which vary even more than regular health care costs.
“They are unpredictable, sometimes large, sometimes zero, and rarely covered by health insurance other than long-term care policies, which are increasingly difficult to obtain or afford,” Vanguard says.
Half of individuals will incur no long-term care costs and a quarter will spend less than $100,000, according to Vanguard. About 15%, however, will spend more than $250,000.
Even though many retirees may never need long-term care, they are encouraged to plan for these costs as they “represent a contingency that may need to be paid for at any time,” says Vanguard.