Convergence and Conflict

Health and wealth can be at odds in retirement planning, but advisers say investors have options to align those factors.

For years, wealth managers have been advising younger clients to build a retirement plan that didn’t make Social Security a key element. The uncertain future of a federal transfer program expected to see its last surpluses in 2020—and to run dry in 2033—made that a prudent call.

But what about Medicare, the other half of the federal retirement picture? It’s not quite as rosy as Social Security, with its own projected insolvency date of 2030. Factor in the continuing escalation in health-care costs—supplemental insurance, prescription drug insurance, long-term care insurance and the like—plus the expectation that benefits for each transfer program will be severely curtailed more than a decade be-fore the last members of Generation X reach full retirement age, and retirement-planning becomes a very different discussion.

In wealth-management circles, it’s known as convergence, the challenge presented at the intersection of wealth and health. And it’s a sizeable challenge for many who are still investing for retirement, whether Millennial, Gen-Xer or Baby Boomer. Eighty percent of the latter, in fact, rate health-care expenses as retirement concern No. 1—but only 12 percent have financial plans for retirement that addresses the health-care piece.

“It is a complex topic,” said Chris Long, president of Palmer Square Capital Management. “Investors aren’t always confident they’ll have enough to pay their medical expenses in retirement, and if it’s expensive now, it will be even more so with age. That puts a lot of pressure on the fixed-income portion of the investment portfolio, and there’s a huge increase in the need for income generation to fund out-of-pocket living expenses and health-care costs. And that has to happen while generating a total return that allows the portfolio to grow.”

Ken Eaton, an adviser with Stepp & Rothwell, identified three key points of client concern.

“Number one, the availability of coverage; two, the cost of current coverage, and three, the uncertainty piece: What’s going to happen and what can I do about it?” Eaton said. “When it comes to availability, regardless of what you think of ACA, it’s been helpful to our clients, because a lot want to retire early before they’re eligible for Medicare. In the past, they would put that off because of availability concerns, pre-existing conditions, or the cost. They didn’t get to be where they are by being stupid with their money, and they don’t want to spend more than they have to.”

But younger investors aren’t benefitting from ACA nearly as much, said Kerry Lawing, of Lawing Financial. “The ones getting ready to retire are caught in the crosshairs of ACA, and they are facing a difficult dilemma. We don’t do health insurance, so we have no skin in that game, but we’re seeing premiums up for our clients 20-30 percent last year and another 20-30 percent  this year. If you retire before before 65 and have to take COBRA, it’s 30-40 percent higher than two years ago on costs.”

A lot of people were struggling to make the math work, anyway, Lawing said, then along came the Affordable Care Act. “And it’s exactly the opposite of affordable,” he said. “Along with that, most plans have included increased deductions and higher co-pays. With our own plan, we were told by our provider that we had to reduce benefits under the plan, because if we didn’t, we’d get hit with the Cadillac tax.”

ACA won’t be fully implemented until 2018, so its full effects have yet to be felt. That plays directly into the uncertainty piece that Eaton cited.

“We could all pontificate about what might happen in the future,” Eaton said, “but the system we have now is most likely the one we will have for some time; we have to work under it. People don’t know what their health-care spend will be in 20 or 30 years, and clients don’t always have the full story about how Medicare works, or what to expect.

“Our job,” he said, “is to stay current on the law and developments in the health-care industry. We can model different scenarios, so people can see how an extended stay in long-term care facility would affect them. The majority of our clients can cover pretty much any normal health-care costs they might encounter; our job is to provide perspective, help them find insurance and take advantage of the regulatory and tax benefits available to them.”

For individual investors, advisers say, all of this means knowing that your wealth manager understands, in detail, what’s happening with health care costs and those trends. And it means taking a long and early view.

“The number one thing that needs to happen,” said Lawing, “is that people need to start looking at least five years out, which is tough now because you don’t know what that will mean in costs. So start planning sooner, start talking to an adviser, get your HR Department involved so you can understand what all of this looks like.

“The second part is accepting the fact that we’re all going to pay more for health insurance, whether as an employee or retiree, than we’ve been accustomed to in the past. That’s probably not going to go away.”