These steps can ease clients’ fears about high health care costs.

These steps can ease clients’ fears about high health care costs.

No matter who crunches the numbers, there’s one thing retirees can expect: high health care bills. Along with housing, health care is among the biggest of retirement expenses, and yet it’s one that not enough people plan for. 

According to a 2016 survey from Nationwide Retirement Institute, the majority of people 50 and older either don’t know what their health care costs will be or wildly underestimate them.

The survey also found that 64% of people are “terrified” of the impact of runaway medical expenses on their retirement plan. They’re right to be concerned. According to Fidelity, a 65-year-old couple can expect to shell out $260,000 for health care during retirement. The EBRI, which tracks retirement readiness, says that a retiring couple should budget $350,000 if they want a 90% chance of not running out of money.

There are ways, however, that CPAs can help clients find strategies to prepare for the costs of health care in retirement—and alleviate their fears about those costs.

  • Reframe the costs. Have them think of the sums as part of their monthly retirement budget—a more manageable concept.
    • Use health savings accounts as a sources of money. Put money in health savings accounts (HSAs), which allow for tax-free deposits and tax-free health related withdrawals. If you can load up on your HSA, you may realize triple tax efficiency because you get a deduction upfront, pay no tax on the earnings, and can withdraw money tax-free.
  • Take control of your health care spending. Retirees—or their caregivers—must be ready to question doctors about the necessity of all tests and procedures. And families need to have honest end-of-life discussions, and think about when to opt for palliative care instead of costly, invasive treatments.
    • Use insurance to reduce uncertainty around health care costs. Part of the reason health care is so difficult to plan for is because it’s so variable. At 45, it’s hard to know what your health status will be in 20 or 30 years.
    • Consider long-term care insurance. Long-term care costs can be entirely unpredictable—and substantial. Drugs can be expensive, and hospital stays are expensive, but what breaks people is long-term care.

Here’s why: The average annual cost of a semiprivate room in a nursing home is $82,128, according to Genworth’s Cost of Care Survey. Though almost three-quarters of people stay in a nursing home for less than three years, a small minority, especially those with Alzheimer’s, can require care for many years. A couple should budget $130,000 for long-term care on top of the amount they budget for other health care expenses.

For that reason, many CPAs encourage their clients to get long-term care insurance when they are in their 50s. Policies can be expensive, but for people who wind up using the benefits, they can be a lifesaver.

  • Think about continuing care retirement communities. For clients who have not purchased long-term care insurance, they might consider a continuing care retirement community (CCRC). CCRCs allow people to first live independently, and then move into a facility on the same campus that provides more health care services as their health declines. Some CCRCs require a sizable deposit plus monthly rent; others, only rent. You have to do it when your health is still good. People with serious health problems won’t be able to purchase housing in CCRCs.

Getting clients focused on health care early will improve their overall readiness for retirement. Though the cost of health care will remain a bogeyman for many, strategies like these can help reduce clients’ anxiety about costs and help them find solutions that work for their budget.

by Ilana Polyak, Courtesy of AICPA

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