Five Steps to Prepare Clients for Retiree Health Care Costs (2024)

Paying for health care costs in retirement can be a scary subject for many people, and clients want help solving this financial puzzle. It turns out that only 21% of retirees with advisors actually receive advice on health care planning.¹

Financial advisors can help reduce investor anxiety by sharing recent T. Rowe Price research² that shows retirees’ health care costs are more predictable, manageable, and easier to plan for than scary headlines suggest. These five action-oriented steps can help calm clients’ nerves and better prepare them for the real costs of retiree health care costs.

• Reframe the discussion about funding health care costs by downplaying worst-case scenario projections and, instead, stressing how the health care costs that a typical retiree faces are far more affordable and predictable than they think.
• Urge clients to resist thinking about retirement health care costs as a giant lump-sum figure. Instead, focus on annual costs, which are smaller and incurred over time, which makes paying for medical care more manageable.
• Drive home the fact that when it comes to health care costs, insurance premiums are typically the biggest expense as well as the most predictable and easiest to plan for. For example, the estimated annual cost for the typical individual age 65 and older with Medicare Parts A (hospital insurance), B (medical insurance), and D (prescription drug insurance) coverage is $3,500, of which 73%, or $2,600 of that total, is for premiums.

Premiums account for the majority of annual health care costs

Estimated annual expenses for Medicare parts A, B, and D for individuals age 65 and older

• Stress that health care “shocks” aren’t frequent occurrences. Certainly, health care cost shocks (which tend to increase with age) do occur, but they are not as prevalent or costly as you might think. In fact, 78% of retirees avoid expense shocks of $2,000 or more altogether. Research shows true expense shocks due to things like dental surgery aren’t the catastrophic budget-busters they’re made out to be. It turns out that only 11% of retirees experienced a health care cost shock ranging from $2,000 to $5,000, and just 2% got hit with unexpected medical bills of $25,000 or more over two years.³
• Point out that overall spending in retirement on food, housing, and other things tends to decrease after age 75, making it easier to cover health care costs.

Overall spending decreases as people age

Average annual retirement expenditures by type of expense

• Since the cost of Medicare varies depending on what coverage your client selects, we suggest following this three-step approach to help them make their choice:
  • Alert: Set up a system in which you can ensure that clients are meeting all Medicare deadlines.
  • Educate: Help clients understand that there are different financial implications depending on the Medicare coverage they select.
  • Plan: Incorporate their Medicare choice into your planning.

• A challenge when mapping out a plan to cover health care costs in retirement is not having solid numbers to back up your projections. But now you can use our cost projections as a guide during client planning presentations.
• We’ve run cost projections for three different Medicare coverages, focusing on the typical costs at the 50th percentile and more extreme costs at the 90th percentile. For example, for retirees with Medicare Parts A, B, and D coverage, 50% of retirees will experience expenses of $3,500 or less per year and 10% can expect to have higher expenses of $8,300 or more per year.

Adopting an annual mindset enables you to work with more realistic costs

Total annual health care spending

• Let your clients know there are multiple savings accounts that minimize taxes and provide opportunity for growth that they can utilize to pay for health care expenses in retirement, including pretax accounts, Roth accounts, and health savings accounts (HSAs).
• Make sure your client understands the benefits and tax treatment of each option. HSAs, for example, offer a triple-tax advantage, as contributions are tax deductible, growth is tax-deferred, and withdrawals for qualified health care expenses are tax-free. And let your client know that one benefit of an HSA is that they can invest the money deposited to potentially grow it, and they can have more money invested if they use other savings to pay for out-of-pocket medical expenses.

• Discuss with your client how projected health care costs will impact the way you construct their portfolio and make asset allocation decisions.
  • Discuss how you will budget for the ongoing expenses of Medicare premiums and expected out-of-pocket costs.
  • Determine how you might manage extreme expenses if they arise, including an emergency fund and insurance.
  • Review why including equities for potential growth can help mitigate the higher likelihood of late-in-life extreme expenses.

While headlines focus on more sensational examples of health care costs in retirement, these five steps can help you deliver a more balanced and fact-based message to your clients: Health care costs in retirement are manageable, relatively predictable, and can be planned for in advance.

¹T. Rowe Price Retirement Savings and Spending Study (2023).
²T. Rowe Price Insights: “Planning for Unexpected Health Care Costs in Retirement” July 2023
³ T. Rowe Price estimates from the Health and Retirement Study (2012–2018). Expenses are measured in 2022 dollars.

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