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James Sullivan

Smoking and Obesity May Positively Impact Your Client’s Healthcare Costs

Here’s why.

February 13, 2012
by James Sullivan, CPA, PFS

Clients close to retirement are never quite as wealthy as they think they are. This is because they rarely consider the cost of healthcare after age 65. Proper retirement projections must take such costs into account. But clients have a surprise in store when their personal financial specialist (CPA/PFS) raises the issue. In particular, healthy clients may be under the delusion that their healthcare costs will remain relatively low when compared with their less healthy counterparts. Good health, however, does not necessarily translate into savings on healthcare costs. Individuals or couples reaching age 65 and in good health can expect to face greater out-of-pocket healthcare costs than a less healthy couple or individual. That’s because unhealthy individuals will most likely die at younger ages, incurring less overall healthcare expense.

The healthy individual will likely live longer but still face the inevitable decline in health that accompanies aging. The health problems of the “old old” (defined as those age 85 and older) are not typically incurred by the less healthy who die within a few years of retirement. The less healthy typically die younger of cancer (cancer deaths peak at age 70) or heart and lung failure (which peak at age 80). The “old old” die of frailty (although this term is not used as the actual cause of death). Frailty is preceded by a longer period of custodial care that is expensive and, with few exceptions, is not paid for by Medicare. Deaths by organ failure or cancer have their own care “trajectories” and costs. While custodial care may be needed in all cases, it typically lasts much longer as an individual becomes increasingly frail.

The present value of the cost of healthcare for a healthy couple is $265,000 after age 65; for a couple with one or both suffering from a chronic illness, the present value of the cost of healthcare is $220,000 or $45,000 less than the healthy couple. These costs do not include the expense of long-term care.

A recent report by the Scripps Gerontology Center, Miami (Ohio) University and the MetLife Mature Market Institute, Women, Retirement and the Extra-Long Life, (September 2011) added long term care costs. The report noted that a woman’s lifetime healthcare expenditure averages $361,192 vs. $268,679 for a man. More than half of this difference is due to a woman’s longer expected life, which is eight percent higher than that of a man. Go into any long-term-care facility and you will see the overwhelming number of female residents compared to male residents.

CPA/PFS planners often ask clients questions about their health and their family history to determine if the client may have a longer life expectancy than average. A longer life expectancy requires a different distribution strategy to increase the chances that the retirement nest egg will last at least as long as the client.

Wellness After Age 65

Given the increased healthcare costs of good health, what purpose does a wellness program for those ages 65 and older serve?

The fact is that wellness after age 65 is more about quality of life, not about saving healthcare costs. In fact, most books about wellness for seniors state that a longer life should not be the ultimate goal. It is the quality of life that should be the focus (for example, see Dr. David Fisher’s book, How to Keep Mom (and Yourself) Out of a Nursing Home. Fisher is a board-certified family physician with specialty certification in geriatric medicine and hospice/palliative medicine based in Chicago).

Wellness programs after age 65 are about helping the elderly maintain their independence as long as possible. Recent surveys show that seniors fear the loss of independence and a move into a nursing home more than they fear death. The CPA/PFS should address these concerns as part of the overall planning process.

Fisher believes that current retirement planning is too narrow focusing only on the client’s finances. Planning for healthcare costs is an important component, but as he points out “… retirement planning is often based on the assumption that independence can be guaranteed with money.” Independence is not a function of wealth, but of health.

Expanding the Retirement Planning Discussion

What role should the CPA/PFS play in his or her clients’ healthcare planning after age 65? Certainly it should be a broader discussion than merely educating the client about Medicare and the pros and cons of long-term healthcare insurance. It should also include the financial facts of healthcare costs. Pointing out the counterintuitive fact that healthier retirees often spend more on healthcare than the less healthy retiree is a great place to begin.

Financial modeling should include several “what if” scenarios on the out-of-pocket costs of healthcare. These illustrations can often successfully communicate concepts that a general discussion cannot. This is especially true for the healthy clients who expect a longer than average life span.

CPA/PFSes are not wellness experts and should not provide such advice. But those who work with older clients should educate themselves regarding the biological and financial impacts of aging. Planners need to understand what a wellness program can and cannot do for clients. Fisher does not argue that his book represents a fountain of youth. Wellness programs can only play a role in delaying the loss of independence, not preventing it altogether. Despite claims of the advocates of miracle anti-aging products, nothing can be done to stop the inevitable physical and mental decline that accompanies old age. Understanding the aging process and the costs associated with that process is important for planners.

Two excellent (and realistic) resources on the realities of aging are Dr. Muriel Gillick’s The Denial of Aging Perpetual Youth, Eternal Life and Other Dangerous Fantasies as well as Susan Jacoby’s more recent Never Say Die: The Myths of the New Old Age. While most people enjoy stories about the 100 year old who remains feisty and alert in her old age, the reality is different. Only a few lucky individuals will reach advanced age in good health.

The CPA/PFS should pay careful attention to the impact of healthcare costs on the finances of clients age 65 and older. Of course, the actual pattern of such costs will vary from client to client. The benefits of a wellness program will improve the quality of life but at the potential cost of higher healthcare expenditures. But that is a trade off any of us would be happy to make.

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James Sullivan, CPA, PFS, works with his wife, Janet, who is an elder law attorney in Naperville, IL.

* The AICPA’s Personal Financial Planning Section is the premier provider of information, tools, advocacy and guidance for CPAs who specialize in providing estate, tax, retirement, risk management and investment planning advice to individuals and closely held entities. The Personal Financial Planning Section is open to all Regular Members, Associate Members and Non-CPA Section Associate Members of the AICPA. If you are a CPA who wants to demonstrate your expertise in this subject matter, become a Personal Financial Specialist Credential holder. Visit www.aicpa.org/PFP to learn more.

** PFP Section members, including PFS credential holders will benefit from additional Eldercare resources in Forefield Advisor on the AICPA’s PFP website at aicpa.org/pfp.