Longer lifespans and challenging healthcare costs are driving Americans to explore ways to minimize their financial exposure to uncovered bouts of care.
The United States spends roughly $3 trillion annually on medical care, or just under $10,000 per capita—well above its peers in the developed world. And while the pace of increase has slowed to the single digits, clocking in at 5.3 percent in 2014, it still outpaces that of inflation and wage growth.
Systemic efforts to rein in costs have met with some success. Increasingly consolidated hospital networks are better positioned to deliver treatment at scale and pass savings onto patients and insurers; state insurance marketplaces have brought millions under subsidized insurance umbrellas; and a new emphasis on preventative care is intended to address medical issues before they snowball into chronic and costly conditions.
But at the same time, one mark of the changing healthcare system—patients shouldering a larger share of treatment costs—is driving up out-of-pocket expenses across the board. The brunt often falls on the elderly, who require the most care.
Rising costs mean that it’s incumbent on future retirees to take steps to minimize their financial exposure to uncovered bouts of care. But whereas the incentives for saving for retirement are easy to digest—to be able to afford a certain lifestyle after working years—planning for the less palatable aspects of old age are more challenging.
Planning for the Future
According to the American Association for Long-Term Care Insurance, more than two thirds of adults will require some form of long-term care after age 65. Another recent report found that one year of a private room in a nursing home care costs $91,250 today; in 20 years, that number is projected to reach $295,960. Even robust portfolios may be unfit to absorb costs of that magnitude, yet many retirement-age Americans tend to avoid planning for those expenses.
The Centers for Medicare and Medicaid Services estimates that overall medical costs will rise about 5.8 percent annually through 2024, and longer lifespans mean a growing portion of the retired population will live longer with chronic conditions that require specialized care not covered by Medicare.
Faced with these daunting numbers, the question is: How do you get ahead of unanticipated medical costs and mitigate their impact on your investments—and in the process, preserve wealth to transfer to your heirs?
The Costs of Not Knowing
A 2015 survey by Nationwide Retirement Institute found that 79 percent of respondents have no clue what their healthcare costs will be or dramatically underestimate them—even though 63 percent report that their top fear about retirement is out-of-control healthcare costs.
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 healthcare—of which more than half goes to Medicare premiums—and they will spend somewhere between $240,000 and $420,000 over the course of their retirement, depending on their lifespan and health conditions.
Should they encounter serious medical trouble, the costs are even higher. “What’s frightening is that people don’t understand the uninsured costs they may face,” says Aaron Edelman, a Morgan Stanley Private Wealth Advisor. “If someone gets a stroke and is unable to move the right side of their body, they’re going to live a long time, but will need 24-hour assistance.”
According to Edelman, 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 disease. 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.
The projected cost of the average nursing home in the U.S. in 2016 is $95,000 a year, while higher-end nursing homes can cost north of $180,000 a year. Even in-home custodial care will cost the average American $60,000 to $140,000 a year, according to the Genworth 2015 Cost of Care Survey.
Protection for Retirement
By the time people reach their 30s, they tend to have a pretty good idea of the lifestyle they want to pursue, McGarry says, including in retirement. There are a number of ways to save for retirement with your future healthcare 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.
In addition, Edelman recommends LTC insurance to younger investors: “as much as you can get.” However, 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 policies or withdraw or annuitize annuities. However, this would probably not cover the cost of care should someone need care for another 15 or 20 years.
McGarry says younger investors seeking less risk may want to couple mutual fund portfolios with some annuity exposure, while those within 10 years of retirement may lean their portfolios toward variable annuities that offer market upside 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 healthcare cost today. One answer may be a securities-based loan. When faced with a large healthcare expense, investors often liquidate financial assets to cover liabilities, but this strategy may have costs which are not always obvious, 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 strategy unchanged. Your financial advisor can provide additional information about the options available to you to help optimize your balance sheet and potentially cover large, unexpected healthcare expenses.
Borrowing against securities may not be suitable for everyone. You should be aware that there are risks associated with a securities-based loan—including possible margin calls on short notice—and that market conditions can magnify any potential for loss.
As the costs of healthcare continue to rise, it’s important to understand all of the options available to protect the assets you’ve spent a lifetime accumulating. Contact your financial advisor to help you choose the product that offers the optimal combination of cost and benefits. iBi
Cathy S. Butler, CFP, CRPC is a financial advisor with the Butler/Luthy Group of Morgan Stanley. For more information, visit www.morganstanleyfa.com/thebutlerluthygroup.