Many of us have been impacted by having to care for a parent or loved one due to health issues, myself included. Here we’re going to discuss health care costs beyond whatever is considered “normal” today.
There is no question non-recurring health care services are a risk that needs factored in to retirement planning. These services include home health care, nursing home stays, etc. While possible a couple may experience lower incremental expenses than a single person, we do not factor that into our planning metrics. In our view the purpose of planning is to help our clients prepare for possible or likely future events. We don’t believe it’s possible to determine if one spouse may be able to assist in caring for the other in the future.
As a result we plan according to each individual, be they partners or single. We then incorporate this risk into all retirement plans to determine if a client (or clients) has sufficient assets to cover a long-term health event post retirement. To accomplish this we utilize state-specific data from Genworth to project health care expenses beyond a client’s baseline.
For planning purposes, we average the 6 costs measured in the aforementioned survey, ranging from home care to a nursing home with a private room. For example, the average in Virginia is $53,654 (for 2015) in incremental expenses for an individual, regardless whether we’re counseling a couple or an individual. We round up to $55,000 per year, and use an inflator of 3.64%, a bit higher than the inflation experience in Virginia for the last five years.
The next phase in our analysis is modeling a future scenario for our client. Our default assumption is a health event occurring in the last 4 years of life, utilizing the above number for incremental health care expenses. We can change that depending on the discussions with our client. However this is generally viewed as reasonable.
After this we analyze what their cash flow analysis looks like if they experience a health event in their last four years of life. We treat a couple in the same way, and analyze the cash flow and the commensurate result on their available assets. If the analysis illustrates this creates a financial future problem for them, we look at various ways to solve it. Even if you have sufficient assets, we discuss whether you may want to protect their assets if they are looking at legacy goals. These goals may range from passing assets to heirs, gifting goals, etc.
The bottom line is long-term health issues are likely in any planning horizon, and should be considered in a retirement plan. We suggest professional help in working through all these issues, such as a CFP® from the Garrett Planning Network. Call….we can help!