By Jim Gothers of Merrill Lynch Wealth Management
Medical costs will likely continue to climb throughout the coming decades. Here’s how you can help prepare for health care needs without derailing your retirement plans.
The average American lifespan is getting longer, and staying healthy is growing more expensive. No matter what happens in Congress, rising health care costs will likely continue to be a concern for both retirees and those approaching retirement.
Especially worrisome is the cost of long-term care (LTC). It’s estimated that 70 percent of Americans over age 65 will require some form of LTC, which Medicare typically does not cover. Meanwhile, costs for an array of LTC services, ranging from visits from a home health aide to full-time nursing-home care, have risen at nearly twice the overall rate of inflation during each of the past five years. These statistics can cast a pall over even the most comfortable retirement nest egg. A long-term illness can have a serious impact on retirement income and wealth transfer plans.
Most investors know they should set aside extra savings to protect their nest egg against the potential impact of illness and aging. How to allocate that money depends on a number of factors, including your age and the condition of your health, as well as your financial circumstances. It’s important to put it in the context of your entire portfolio. When preparing for future health care costs, apply the same framework of risk tolerance and personal vision you use for all of your investing decisions. Then consider how these four strategies can help you balance your financial goals with your health care needs.
Long-Term Care Insurance
Long-term-care insurance, the most familiar option, is designed specifically to help pay for long-term health expenses that aren’t covered by Medicare, such as home health aides and nursing-home care. Because these policies are designed to help cover these expenses, they tend to cost the most.
The premiums can deter people who are concerned that they may not use the benefits. Still, if you want to help protect your assets from LTC expenses, a long-term-care policy may make the most sense. Weigh the costs against your risk tolerance and ask yourself how you might otherwise meet these needs: One year of at-home care at 12 hours daily currently can cost nearly $100,000, while three years in a nursing home might easily reach $200,000.
Before purchasing a policy, find out whether it includes an inflation-adjusted benefit to help protect against rising costs. The timing of your purchase also warrants careful thought. Although you’ll make more payments over time if you buy the policy while you’re still relatively young and in good health, you’re likely to pay a lower premium. The “sweet spot” for buying LTC insurance typically falls somewhere between ages 55 and 70.
Annuity With an Enhanced Income Benefit
Many people use variable annuities as a source of retirement income. For an additional fee, some variable annuities offer an optional rider that provides an increase in retirement income in certain circumstances, such as a disability or a chronic health condition. Designed to provide extra income in the event your health changes, this rider available through a variable annuity is not meant to replace health insurance or long-term care insurance. Although the overall benefit may also be smaller than that of traditional LTC insurance, the cost is also lower, and you have the added advantage of addressing more than one need with a single product.
Life Insurance Policy with an LTC Benefit Rider
Another way to help cover long-term health expenses is through a life insurance policy with an LTC benefit rider. This pays a specific LTC benefit if you need it. Otherwise, the policy can provide your heirs with a guaranteed death benefit. Consider the following hypothetical example. Say a 65-year-old woman – a nonsmoker in good health – invested $100,000 in a life insurance policy with an LTC benefit rider. If she needed long-term care, the policy could cover up to $499,000 of expenses. If she didn’t use the LTC benefit, her estate could receive a death benefit of $166,000, presuming no loans or withdrawals were previously made. And if she decided to cancel the policy altogether, the $100,000 premium could be returned to her. This guaranteed return of the premium offers purchasers additional flexibility with how they allocate their assets.
(Editor’s Note: This is a hypothetical example and is not an actual illustration from a life insurance company. Ask your Financial Advisor for an illustration for your personal circumstances.)
Self-Funding Long-Term Care
Paying for LTC costs out of your own assets offers the greatest degree of flexibility, but it also incurs the most risk exposure. You’re essentially taking the chance that your health care costs will not exceed your assets. You will pay for only the care you receive. However, this strategy can affect your ability to achieve other goals, such as transferring some of your wealth to your children, your grandchildren or a charity.
If you decide to self-fund, do a risk assessment. Assuming a worst-case scenario, how much would it cost to ensure that you and your loved ones get the medical care you need? Then work with your Financial Advisor to develop a strategy to help save for that eventuality.
It’s impossible to predict exactly how much money you will need to cover your long-term health care needs. But implementing a strategy now could help safeguard your assets for the future; whatever health issues the future may hold.
Jim Gothers is in Merrill Lynch’s Wealth Structuring Group.
For more information, contact Merrill Lynch Wealth Management Advisor Mark A. Maggs, CIMA®, CRPC®, CSNA, CFM, Senior Vice President – Investments, of the Wyomissing office at 610.320.5462 or www.fa.ml.com/maggsgroup
