Analyzing your Client's Healthcare Costs in Retirement
For CPA's and Consultants
Health Care Costs is one of your
client’s biggest concerns…
For Certified Public Accountants
I'm sure you realize the importance of correctly analyzing the health care costs of your clients. They've entrusted you with their future - what will you do? Anything less than the correct inclusion of health care costs and life expectancies can result in catastrophe for them!
Health care costs can range from very little to well over a million dollars over the lifetime of your clients. This wide possible range of long-term care and other health costs, and the fact that your clients could live to a ripe old age or die soon,make it irresponsible to project a level amount of costs each year (even if adjusted for inflation), or to ignore these health costs altogether, or to have your clients purchase (if they are indeed insurable) long-term care insurance without a thorough analysis of such an expensive product, or to project a single age at death for each client (all these simplified methods are, unfortunately, commonly used in retirement planning.)
Let PDRP Plus assist you!
PDRP Plus can produce probability distributions of your client's (either a single person or a couple) health care costs. These calculations are customized to your client's health and longevity profiles through the use of questionnaires. These probability distributions can incorporate long-term care insurance, immediate or deferred income annuities, medicare supplement insurance and other strategies to see if they are right for the client. And they can be used as part of a comprehensive financial plan, which will help determine the amount of spending that can occur, so that your clients will not run out of money while alive, as well as examine other financial goals your clients desire.
Which of these two scenarios would you rather be a part of?
You advised a couple, both aged 65, who are ready to retire in three months, that they could withdrawal 25,000 per year from their portfolio to live on (adjusted for inlation), and that if they did so, they would have a very high probability of not outliving their assets.
The $25,000 was supplemented with their Social Security income, and they were very pleased with their standard of living based on your recommendation. In coming up with this recommendation, you assumed health care costs would consist of Medicare Part B and Part D premiums, along with Medicare Supplement Part F. These costs you assumed would grow with inflation each year. You also assumed that the husband would live to age 82 and the wife would live to age 85, about the average life-span for retirees aged 65.
Unfortunately, both husband and wife are very healthy, and have life expectancies of age 86 for the husband and age 89 for the wife.
These higher life expectancies mean that they have better than 60% chance that at least one of them will live past age 90 and over a 35% chance that one or both of them will live past age 95. Their long life expectancies, even though they are healthy now, opens them up to the risk of needing long-term care at advanced ages. Their long life expectancies also expose them to suffering various chronic conditions, resulting in higher prescription drug costs (Part D does not cover all their drug costs). The combination of long-life expectancy and the high probability of incurring high health care costs means they really have only a 35% chance of not outliving their assets with a withdrawal of $25,000, each year (adjusted for inflation).
So these clients, because they spent too much too early (based on your advice), will very possibly have grave financial problems in their old age. Agreed, they could start to adjust their spending down as they age to compensate for their overspending earlier in their retirement, but there are many pitfalls associated with this repair strategy (such as having 85 year olds tightly managing their assets, severely reducing their standard of living, etc.) A problem with advising retiring clients is that it may take many years to see if your advice was the right advice! These problems may not appear until ten or more years into retirement. It is critical to use the best tools available for your client's well being from the outset!
Same as before, but you incorporated their range of health costs and the full range of their possible ages at death into their retirement plan. You used PDRP Plus to do this as part of a comprehensive financial plan. You advised them that they could withdrawal only $10,000* from their portfolio (supplemented with their Social Security income). With that withdrawal amount, they have a 93% chance of not outliving their assets, and are told that percentage. They examined their future spending and were able to live with that annual withdrawal. Under this scenario, their lower spending means that they will very likely be financially secure in their old age.
* the 10,000 annual withdrawal does not represent a $15,000 reduction, since the $25,000 includes health care costs but the $10,000 does not.
I hope it is clear by now that advising retiree clients involves much more than just investment, estate and tax advice!
There is no "one size fits all" computation for all of your clients.
The recommendations are very dependent on:
The size of the asset portfolio
The health and life expectancy of the clients
The other goals of the clients, including the amount of desired inheritance
The acceptable chance of achieving the client goals (in the eyes of the client)
Recommendations are needed for:
Long-term care insurance: buy or not buy? If buy, how much and what features?
Deferred Income annuities: buy or not buy? If buy, how much and when does income start?
How to achieve the financial goals of the client, taking into account the full range of health care costs and the full range of possible life expectancies!
PDRP Plus can deliver these recommendations!
Want to learn more?