Plan for Colossal Health Care Costs, NAPFA Audience Hears

LAS VEGAS -- Advisors are not doing a good enough job planning for health care costs.

That's the blunt truth, Carolyn McClanahan, a financial planner and physician, tells Financial Planning at the NAPFA conference in Las Vegas.

To do a better job advising clients of health care costs, however, advisors must first educate themselves, says Rick Mayes, an associate professor in the University of Richmonds department of political science and a speaker at the conference. "The ways Americans are aging have enormous financial implications."

HEALTH CARE STRAINS AND LONGEVITY

Health care represents a colossal one-sixth of the US economy -- and is on track to be one-fifth in the next few years, according to Mayes.

A total of 3.5 million to 4 million people each year will reach the age of Social Security eligibility in the next roughly 17 years -- figures that have been continuously updated as the U.S. population is aging faster than expected, partly driven by technology enabling people to live longer. "But with longer lifespans, Medicare and Medicaid are becoming a financial threat to our country," Mayes says. "Medicare spends $60 billion per year just on the last two months of life."

With longer lifespans comes more time for chron ic diseases, which can put a huge dent into client portfolios, he says. While there are some areas, particularly poorer areas in the South, where life expectancy is actually decreasing, on average people in the U.S. are gaining 10 to 15 years in life expectancy compared to people who lived two to three generations ago, Mayes says.

PLANNING DESPITE UNKOWNS

Financial planners can't predict what people's health care needs are, industry sources say. "If clients live a healthier lifestyle, that will decrease health care costs," according to McClanahan. "And if they have a serious illness, advisors must discuss clients' approaches to treatments. Do they want to go to the ends of the Earth to be cured -- spending a fortune -- if they have a 10% chance of living?"

The current approach among advisors when it comes to planning for medical costs, she says, is to set aside a couple hundred of thousand dollars. "But that's a flawed approach. That's not good enough. Every person is different."

When addressing health care with clients, include the following subjects into the discussion, she advises:

Cash flow: What is your cash flow to pay for serious illnesses? Do you want to tap into your retirement plan or access life insurance benefits?
Tax planning: Understand all co-pays and out of pocket expenses. Track these during serious illnesses for more effective tax planning.
Family deductibles: If you know your clients have hit greater than 10% of adjusted gross income for deductibles, make sure everyone in the family gets their health needs taken care. All of those expenses are deductible.

Advisors face more unknowns than knowns when it comes to the health care costs of their clients. Despite uncertainties, advisors must make sure they understand the realities of health care and the way clients deal with health concerns before major issues arise, McClanahan says.
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Paula Vasan