What Advisors Need to Know about Health-Care Planning

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Many people assume that once they retire, they need not worry about healthcare. They think Medicare is free and will take care of all their health-care needs.

That's not true.

Those who have cared for an ailing parent or a grandparent know the financial and lifestyle implications healthcare has for themselves and their loved ones. Consumer awareness is definitely lacking in this area. Many seniors need to know that every year, they can and should decide on different health-care options based on their changing needs.

Additionally, some people may think they can part with a good chunk of their assets to qualify for Medicaid. But the rules for Medicaid eligibility are becoming more and more stringent. In fact, Medicaid requires a five-year look-back on gifts of assets.

Health-care costs and coverage will continue to be the focus of our national debate. According to the White House Budget Office, the federal government collected about $2.5 trillion in revenue and spent over $900 billion in healthcare in the fiscal year 2012, which was more than one-third of all tax receipts. Medicare alone costs $545 billion, while Medicaid costs about $250 billion. Despite this spending, seniors continue to incur hundreds of thousand of dollars in out-of-pocket health-care expenses during retirement. With the cost of healthcare rising and longevity increasing, these issues will not disappear for the foreseeable future.

Guiding clients through the maze of the health-care choices retirees face is a way advisors can provide meaningful value. Here’s an overview of the Medicare and Medicaid programs to help advisors understand the key economic considerations that will impact their clients.

Financial planning

In order to develop a reasonable retirement income plan and protect a client's estate-planning goals, one must anticipate health-care expenses. Financial planning is all about planning for unknowns: market rates of return, life expectancy and rate of inflation. We create financial plans to manage these unknowns, and health-care expense planning is no different.

A recent survey conducted by Harris Interactive for Nationwide Financial revealed that nearly half of high-net-worth Americans who are close to retirement are “terrified” of what health-care costs could do to their retirement plans. But 38% of those surveyed said that they haven't discussed retirement health-care costs with a financial advisor, in part because they are unsure as to whether their advisor is knowledgeable about the issue. This is not a good sign.

Health trends

Let's briefly delve into some of underlying trends affecting the health of seniors. According to the Alzheimer's Association, more than 5.2 million seniors (about one in eight elderly people) suffer from Alzheimer's, a number that could triple by 2050. Alzheimer's is only one of several leading causes of death. Other diseases, according to Centers for Disease Control (CDC), include cardiovascular disease, cancer, chronic respiratory disease and stroke. These all involve lengthy treatments and care.