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James Sullivan

Two new retirement planning tools

Help is available for understanding the role Social Security and health care play in retirement planning.

July 23, 2012
by James Sullivan, CPA/PFS

This past May, Fidelity Investments reported that a couple age 65 retiring in 2012 would need $240,000 to cover their health care expenses. For many retirees who rely primarily on Social Security as their main source of income, health care expenses will consume 61% of their Social Security income in 15 years ($25,000 of an estimated annual Social Security benefit of $41,205).

Even affluent clients are concerned with rising health care costs. On June 11, The Wall Street Journal cited the results of a Merrill Lynch Wealth Management/Bank of America Corp. survey. Among affluent investors, 79% listed rising health care costs as their top financial concern.

What advisers can do

In the past, careful planning for health care costs and maximizing Social Security benefits was often ignored. In the future:

  • Advisers must take into account retirement health care costs and the pattern of those costs when planning for their clients. Advisers must understand the retirement health care needs of their clients as they age, how these costs are paid and what options are available. Planners should also have some familiarity with chronic illnesses and how the costs of these diseases differ.  
  • Advisers must work with their clients to carefully plan their Social Security distribution strategy and maximize their benefits. Unfortunately, many clients do not realize the distribution options available and that making the wrong choice can cost them $50,000 or more over the course of their retirement—additional dollars that can be used to help at least partially offset their growing share of health care costs. And because out of pocket health expenses increase during the last five years of life, it may make sense to delay taking a Social Security benefit until age 70. Monthly benefits are increased by 32% due to the delayed retirement credit.

In other words, these two topics go hand in hand.

Available resources

Recognizing the role Social Security and health care planning in retirement play, the AICPA recently released two books for CPA planners: The Adviser’s Guide to Social Security: Unlocking the Mystery of Retirement Planning by Ted Sarenski, CPA/PFS; and my book, Unlocking the Mystery of Healthcare Planning for Retirement.

For PFP/PFS members of the Institute, these books can be downloaded free under different titles:

These books are timely. Twenty years ago, baby boomers were skeptical about Social Security being available when they reached age 65 (ironically, less thought was given to the availability of Medicare, which is the more financially vulnerable of the two plans). Back then, many planners purposely excluded Social Security from projections or substantially reduced the monthly benefit in anticipation that the plan would no longer be available or benefits would have to be cut. Nowadays, an average of 10,000 baby boomers is reaching age 65 each day. Due to the economic climate of the past few years, the importance of Social Security and Medicare to a secure retirement has increased tremendously. Knowing how both these plans work will be important for CPA planners hoping to increase their retirement planning business.

What the Fidelity number includes and excludes

The $240,000 estimate reported by Fidelity for a couple assumes the beneficiaries do not have employee-paid health care coverage in retirement. It also assumes that the couple have sufficient work history (either separately or one spouse qualifies based on the work history of the other spouse) to fully qualify for Medicare. The couple are assumed to have elected to be covered by traditional Medicare and not by Medicare Advantage. The male is estimated to live to age 82, while the female to age 85.

Costs include Medicare beneficiary-paid deductibles and co-insurance. Fidelity does not include the cost of nursing home stays. Medicare does not pay for a nursing home stay when it is merely for custodial care (assistance with the activities of daily living, such as eating, transferring, dressing, toileting, incontinence, and bathing). Medicare will not pay custodial-care costs for most patients in a nursing home for an extended stay, such as an Alzheimer’s patient.

Health care expenses can vary tremendously from one individual to another. The Fidelity number is only a starting point and should be adjusted for the health history (and family health history) of the client. But discussing these issues with clients is the best way to get them to think more carefully about their retirement planning.

End of life health care expenses

While the sheer size of the Fidelity number is often the focus of the discussion, out-of-pocket health care expenses incurred during the last five years of life are not often spoken about. Out-of-pocket health care expenses are not evenly distributed throughout retirement. A presentation Amy S. Kelley, of the Mount Sinai School of Medicine, gave in May at the American Geriatric Society annual meeting looked at the out-of-pocket costs incurred by those age 70 years and older during the last five years of life. Cause of death costs varied tremendously:

Cause of Death Total Out of Pocket Spending
(average — final 5 years of life)
Cancer $32,129
Cardiovascular Disease $37,996
Alzheimer’s Disease $66,155

The biggest difference in cost among the causes of death is the cost of nursing facility care for Alzheimer’s disease patients. As the patient’s end of life nears, he or she will spend at least some time in a nursing facility—a stay unlikely to be paid by Medicare.

For each of the three diseases, where the money is spent (not just how much) also varies tremendously. According to Kelley, for the cancer and cardiovascular patients, 18% and 33% of the money goes to nursing home care. For the Alzheimer’s disease patient, 56% of the end of life cost goes toward nursing home care. This share of the expense goes up for those in the top 10% of health care costs in the last five years of life. With a mean expense of $163,121 in that group, 58% of those costs will be incurred in a nursing home.

These numbers reinforce several points:

  1. Projections should take into account the heavier costs incurred in the last five years of life by using different “what if” scenarios. 
  2. The cause of death will impact the final bill. Alzheimer’s and other dementias dwarf, in terms of cost, most other causes of death. This is due to the need for custodial care and requires that any retirement planning consider how those costs will be paid.  While a long-term care (LTC) insurance policy can help pay costs of nursing home care, it may not be affordable or the client may not be insurable. Other sources of funding such as a reverse mortgage should be considered.
  3. The high costs of health care in the last five years of life may be offset in part by delaying Social Security to age 70 and increasing the monthly payment by 32%.

Retirement health care costs are high and planning for the costs is no simple matter. Proper planning for Social Security benefits can help offset some of those costs.

Using the new resources on retirement health care planning and maximizing Social Security the AICPA  now provides, the CPA planner can provide a valuable service to clients.

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

* 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 their closely held entities. All members of the AICPA are eligible to join the PFP section.  For CPAs who want to demonstrate their expertise in this subject matter, apply to become a PFS Credential holder. Visit www.aicpa.org/PFP to learn more.