Longer lifespans and rising health-care costs are driving investors to control their financial exposure to uncovered bouts of care—particularly in retirement.
According to the U.S. Centers for Medicare and Medicaid Services, the U.S. spends approximately $3.5 trillion a year on health care, or nearly $11,000 per person. Overall spending rose 4.6% in 2017,1 faster than the pace of inflation or wage growth. As spending rises, patients are also shouldering a larger share of treatment costs—driving up out-of-pocket expenses. The elderly, who require the most care, often bear the brunt of the costs.
It is important to take steps to minimize your financial exposure to uncovered medical costs. But whereas your incentives for saving for retirement are easy to digest—to be able to afford a desired lifestyle after your working years—planning for the less palatable aspects of old age can be more challenging.
Health-Care Costs Planning
A report from the U.S. Department of Health and Human Services estimates that about half of people turning 65 will need some type of long-term-care services in their lifetimes.2
One year in a private room in a nursing home costs $97,455 today and is projected to reach $176,015 in 20 years.3 Even with a robust portfolio, you may have trouble handling such large costs with savings on hand.
Many adults nearing retirement age are concerned about health-care costs but unsure how to budget for them. More than half of affluent, older Americans are unsure or can’t estimate what their annual health care (53%) or long-term-care costs (65%) in retirement will be.4
Those fears are warranted. An average retired couple age 65 in 2018 may need approximately $280,000 in after-tax savings to cover health-care expenses in retirement. Their actual cost will depend on when they retire, lifespan, and health situation.5
Should they encounter serious medical trouble, the costs will be even higher. Many Americans aren’t even aware of the uninsured costs they may face in these cases. A stroke, for example, may cause paralysis, warranting expensive 24-hour assistance.
Medicare Part A covers nursing facility care for a limited time, but only after a qualified hospitalization. However, Medicare will not pay for nursing homes when custodial care is the only care needed; nor will it pay for care for conditions such as Alzheimer’s disease. Patients suffering from Alzheimer's or other cognitive ailments may live for many years, all the while requiring assistance and, as the disease worsens, expensive hands-on assistance.
Protection for Retirement Savings
By the time people reach their 30s, they tend to have a pretty good idea of the lifestyle they want to pursue, including in retirement, says Kristi Rodriguez, the National Sales Manager for insurance provider Nationwide. There are a number of ways to save for retirement with your future health-care needs in mind.
Investors in their 30s or early 40s, Rodriguez says, may weight their retirement-funding strategies toward a portfolio of mutual funds or a managed-account solution, to provide upside exposure to the market. Given lower premiums for younger policyholders, long-term-care insurance should also be a consideration, she says.
These days, only a handful of insurers offer long-term-care insurance, so another option may be life insurance with a long-term-care rider, which allows families to tap into the benefits they would receive upon the policyholder's death, while he or she is alive and requires care.
Another option for funding long-term-care expenses is to withdraw or borrow money from life insurance policies, or generate income from annuities. Note that either of these options would probably fall short of covering costs if someone needs care for many years.
Paying for Unexpected Health-Care Costs
A final consideration is what to do when you’re faced with a large unexpected medical bill today. One answer may be a securities-based loan, which allows qualified clients to use the eligible securities in a brokerage account as collateral for a loan or line of credit, often at a competitive rate. When faced with a large health-care expense, investors often liquidate financial assets to pay for immediate needs. However, this strategy may have unintended costs, such as tax consequences, potential loss of future growth or an imbalance in your portfolio’s asset allocation.
Once approved, a securities-based loan can provide quick access to funds for a variety of needs with the potential to maintain your long-term investment strategy. Your Morgan Stanley Financial Advisor can provide you with additional information and help determine if this is the right strategy for you.
Help Protect Your Finances and Your Health
As health-care costs continue to rise, it’s important to understand the options you have to help protect the assets you’ve spent a lifetime accumulating. Your Morgan Stanley Financial Advisor has access to multiple long-term-care products from a wide variety of respected insurers and can help you choose the one that offers the optimal combination of cost and benefits.