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Protection to Last a Lifetime

Mike Gray
Senior Vice President | CAPTRUST Financial Advisor

John D. Curry 
Senior Director | CAPTRUST Marketing

A retirement distribution strategy that encompasses investment management, liquidity management, and risk management, when reviewed and adjusted periodically, can create good results for retirees. When addressing risk management, it is a natural inclination to focus on protecting against unforeseen dangers in the capital markets. Certainly, market-oriented shocks can be damaging to the health of even a well-thought-out plan. But what about the impact of other potential shocks — shocks driven by factors other than the capital markets? Considerations such as healthcare costs, long-term care, unexpected health risks, and longer life spans are all important and manageable.

Healthcare Costs During Retirement

On a positive note, it appears that we are not only living longer (well into our 80s), but we are also living better, with much of the “extra time” we are experiencing disability- and disease-free.1 Many health issues that created chronic disability and reduced quality of life for older Americans in the past are no longer as severe. For example, joint replacements are increasingly routine procedures performed with very good results.

While that’s certainly good news, the cost of retirement health care may be substantial. The Boston College Center for Retirement Research estimates that a typical couple, both age 65, can expect uninsured healthcare and nursing home costs during retirement to top $260,000.2 Of course, this number is what a “typical couple” might experience. In reality, some will experience fewer health-related events and costs, while others will experience more. For couples age 70 and older, there is a 52 percent probability that one or the other will experience a major medical event of some kind — with heart disease, cancer, diabetes, and stroke leading the way.3 These medical services and, in particular, subsequent rehabilitation costs, may not be fully covered by private health insurance or Medicare.4

Long-term Care

Care in a nursing home or long-term care facility may range from a period of weeks to years. Short-term care can last anywhere from several weeks or a few months during recovery from surgery, illness, or injury. For example, a person may need short-term rehabilitation therapy at a nursing facility after hip replacement surgery and then go home. On the other hand, care in a nursing home may be ongoing for someone who is disabled from a stroke or who has some form of cognitive impairment such as Alzheimer’s disease. Currently, more than 5 million people suffer from Alzheimer’s disease. Nearly 60 percent of the 70-year olds with Alzheimer’s are expected to live more than a decade — with nursing home admission by age 80 expected for 75 percent.5

More generally, about 70 percent of people over age 65 will need some form of long-term care during their lifetime — and more than 40 percent will need care in a nursing home for some period of time.6 Except in very specific circumstances, long-term care costs are not covered by Medicare or private health insurance.7

Managing Health-related Risks

While the numbers presented here may (or may not) sound dire to you, it is precisely the probabilistic aspect of healthcare issues that makes them difficult to plan for. Due to our innate optimism bias, we humans tend to discount the likelihood of bad things happening to us and overestimate the likelihood of positive outcomes. You may already have decided these things couldn’t possibly happen to you.

However, the probabilistic aspect of healthcare events is also precisely why it might be worth considering insurance to manage these risks:

• Disability prior to retirement can severely impact the ability to save sufficiently for retirement and may even force early retirement. It may be possible to mitigate the risk of lost income due to disability by purchasing either an employer-provided or personal disability insurance policy.

• Uncovered or unexpected healthcare costs can be managed through the purchase of a combination of optional Medicare coverage (Parts B and D) and Medicare supplement insurance.

• The cost of long-term care expenses may be eased by purchasing long-term care insurance. While there has been some turmoil among providers of long-term care insurance coverage, primarily due to mispricing of early generations of their policies, some interesting new options are emerging in the form of life insurance policies with long-term care riders.

• The risk of impoverishing a surviving spouse due to significant end-of-life expenses can be reduced through the use of life insurance. 

Extra-long Longevity

One additional risk to be mindful of is the risk of living a very, very long time — well beyond normal expectations or one’s planning horizon (another thing we humans tend to underestimate). While this may not be relevant or concern the majority of people, individuals with extreme longevity in their families may consider taking steps to manage this risk. To some degree, it can be managed by selecting appropriate asset allocation and withdrawal management strategies; however, planning for a 35- or 40-year retirement period with a desirable margin of safety may require unacceptably low retirement withdrawal levels, forcing a lifestyle reduction. As an alternative, individuals concerned about this risk may consider insurance products like variable annuities with lifetime income benefits or longevity insurance — an annuity product that provides guaranteed income after attaining a particular age (usually 85).

While the longevity trifecta of investment management, liquidity management, and risk management can put you on a path to an effective retirement distribution strategy, it may also be worth addressing a few additional considerations. Healthcare events and the shock of unanticipated and uncovered healthcare costs can put a serious dent into an otherwise sound plan. You may also want to include disability insurance prior to retirement, plus Medicare Part B and D, Medicare supplement, and long-term care insurance coverage during retirement. 

There is no one-size-fits-all answer; every client’s situation is unique and deserves specific attention to address his or her unique needs, goals, and circumstances. We welcome the opportunity to discuss your concerns and stand ready to help in any way we can.

Sources:

1 Cutler DM, Ghosh K, Landrum MB. Evidence for Significant Compression of Morbidity In the Elderly U.S. Population. National Bureau of Economic Research, 2013
2 Center for Retirement Research at Boston College, Does Staying Healthy Reduce Your Lifetime Health Care Costs?, 2012
3 Center for Retirement Research at Boston College, When the Nest Egg Cracks: Financial Consequences of Health Problems, Marital Status Changes, and Job Layoffs at Older Ages, 2005
4 medicareinteractive.org
5 Alzheimer’s Organization Fact Sheet, March 2013
6 nihseniorhealth.gov/longtermcare/whatislongtermcare/01.html
7 medicare.gov