The cost of health care for retirees is a cause for concern, if not outright panic, for millions of Americans.

Indeed, it's a daunting challenge that many experts say represents the biggest single expense that retirees need to plan for.

Peter Stahl, a principal at Bedrock Business Results, and a certified financial planner, cites a recent Credit Suisse study that claimed those over 60 are spending 30% of their income on health care costs.

That means an average of $10,000 a year will be spent on such things as Medigap insurance to cover the things not covered by basic Medicare, as well as co-pays and other medical costs not covered by insurance.

And that is not even counting the costs of long-term care, such as assisted living or a nursing home. Skilled nursing home care, Stahl notes, currently costs about $87,000 a year, with in-home care from an attendant running currently at about $69,000 a year. Five years of that and your client is laying out another $350,000 to $435,000.

Stahl says that a 65-year-old couple who expects to live to 85 should assume they'll be spending about $491,000 on health care, not counting long-term care in a nursing facility.

He notes that as premiums rise for those Medicare programs, the retiree's Social Security benefits will be eaten away significantly, because the Treasury Department deducts the premiums from the checks it mails out—something advisors and clients may not be considering when they estimate a client's future Social Security benefits.

His conclusion: many retirees and future retirees are facing a crisis.

It's enough to make an ordinary couple with a few hundred thousand socked away in a 401(k) throw up their hands in despair. And while the numbers are daunting, Stahl says that "denial is not a good solution."

Lorraine Griswold, manager of insurance services at CUSO Financial, says, "We talk with our advisors about not scaring the client into doing nothing with these health care cost estimates." She adds that CFS advisors do a lot with single-premium long-term care products, which she says can help "take the edge" off of long-term care planning.

LESS EXPENSIVE OPTIONS

Still, a question lingers: Are the numbers really as scary as all that?

Alicia Munnell, a professor of management sciences at Boston College, and director of the college's Center for Retirement Research, doesn't think so, though she agrees that those costs are indeed a concern.

She cites a recent study by colleagues Anthony Webb and Natalia Zhivan which finds that a typical couple currently 65 years old could expect health care costs over their lifetimes, excluding long-term care, to run about $191,000 (with a 5% chance of exceeding $311,000).

Adding in the cost of long-term nursing care, the average figure for a couple aged 65 rises to $260,000 (with a 5% chance of exceeding $570,000).

To be sure, those are still high numbers, but assuming the two people combined have average life expectancies of 80, that works out to about $12,750 a year for the couple, well below a $10,000 annual, per-person cost.

Why are the numbers at such odds? Munnell notes that sometimes people tend to extrapolate the highest cost figures too far. That is, most people do not end up living for years while requiring costly nursing care.

Some do, but when elderly people develop a medical problem that requires around-the-clock skilled care, it is usually either temporary, or happens near the end of life.

Furthermore, nursing care usually follows some health crisis such as a heart attack, stroke or fall.

In those cases, the care is usually provided in a rehab facility and, at least for the first 100 days, is covered by Medicare (full cost for 20 days and 80 days requires a co-pay).

Moreover, that coverage is per-incident, so if someone goes into rehab for 100 days, and then goes home, and two weeks later has another health problem requiring hospitalization, Medicare will cover that second rehab too, even in the same calendar year. Medicare also covers the cost of skilled nursing delivered episodically in the home, if ordered by a doctor.

The real problem comes when an elderly person—usually someone who is living alone—needs around-the-clock custodial care, which, unlike skilled nursing care, is not covered by Medicare.

Even if someone needs help in getting dressed and undressed, making meals, getting up and down stairs or managing personal hygiene, it doesn't necessarily mean entering a costly residential facility, Munnell notes.

Instead, many people can make do, and even be happier, staying home and hiring a live-in companion.

Depending on location and whether the provider is hired privately or through an agency, such services can run anywhere from $40,000 to $70,000 a year.

"Most people," says Munnell, "will end up getting their care at home, provided by loved ones. But you do need to ask yourself: 'Do I want my kid providing that kind of care or just coordinating it?'"

Stahl agrees that the issue needs to be raised by advisors with their 
clients, who often don't want to talk about end-of-life issues. "I have heard clients who will say, 'Oh, well, our daughter is a nurse,' or maybe a 'very caring person,' and they conclude, 'She'll be a wonderful caregiver when we're old,'" he says. "So then you ask, 'Where does she live?' and it turns out to be halfway across the country, in an apartment. So how's that going to work?"

He adds that one possible solution is a hybrid long-term care plan and life policy—something that offers several hundred thousand dollars in long term care, and/or a life benefit to a beneficiary.

But where that may not be an option, because of a client's limited assets, CFS's Griswold says there are other options.

She notes that the baby boom generation just entering retirement age is introducing some new ideas, such as "going back to group living, and other innovations." She adds that some long-term care plans are approving cash payments made to an elder person's kids or grandchildren who are providing care, an option which can stretch the benefits considerably.

Munnell says advisors and clients should remember that there is a "high probability that long-term care will not be that expensive."

She adds that she is also a "big fan" of reverse mortgages, which can allow elderly retirees who find they need more cash to stay in their own home, while using the asset value to pay for such things as in-home custodial care as needed.

She also notes that if funds do run out and a nursing home is needed, there is always Medicaid, a program which does cover those costs for people with limited income and assets.

Moreover, in many states, once someone is admitted into a licensed facility providing elder care, if their assets and income are depleted, they cannot be put out, meaning that facility has to accept whatever that state's Medicare program will pay.

Considering all the options, and the reality of how often long-term care is actually likely to be needed, it is unfortunate that many clients are hearing the aggressive estimates of potential health care costs; to the extent that those with more limited assets sometimes simply give up trying to plan for their retirement.

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