Those are the main takeaways from a Nationwide Financial survey of 1,250 Americans with more than $250,000 in household assets. Conducted by Harris Interactive, the query found that 38% of those nearing retirement have not discussed their retirement plans at all with a financial advisor.
And of those who have, only one in five discussed health care costs in retirement that will not be covered by Medicare.
“Americans—even those who have diligently saved for their golden years—are not prepared for the reality of health care costs in retirement and don't really understand how Medicare works,” John Carter, president of Nationwide Financial Distributors, said in a statement. “Too many assume their employers will continue to pay their premiums during retirement or Medicare will cover all health care expenses.”
But that’s not the reality and this disparity between what health care will cost people as they live longer and how much they’ve saved or will have covered by Medicare represents the single-largest threat to most American’s retirement nest eggs.
According the Employee Benefit Research Institute, Medicare today only covers about 51% of the expenses associated with health care services—much less than the 68% most survey respondents estimated.
“Retirees' access to employer-sponsored health insurance continues to decline, and there are potential changes in Medicare benefits due to the program's projected funding shortfall,” Carter said. “Americans need to realistically plan to be responsible for their own health care in retirement.”
While 45% of those surveyed said they expect health care to be their biggest expense throughout retirement, when asked to estimate how much they anticipate spending each year on health care, they said, on average, only $5,621.
This represents a drastic underestimation based on a 2010 study that estimates out-of-pocket health care expenses for a 65-year-old couple retiring today and living for 20 years to range from $250,000 to $430,000. That could mean as much as $10,750 a year per person in out-of-pocket health care expenses.
"One reason people may underestimate the amount of money needed to cover their health care costs in retirement is that many workers do not think they will ever need long-term care," said Kevin McGarry, director of the Nationwide Institute for Retirement Income. "But studies have found that 30 percent to 40 percent of those reaching age 65 will use nursing home care at some point. Americans also mistakenly believe that Medicare covers long-term care—it does not."
To sort out fact from fiction and make the kind of long-term investment decisions retirees will need to survive this avalanche of expected health care costs, workers should be consulting with financial planning professionals early and often.
But many simply aren’t.
The survey found only 43% of soon-to-be-retired Americans said they plan to discuss health care costs with an advisor.
Of those who are working with an advisor, 12% say they plan to switch advisors in the near future and, of that group, 54% say they would be more likely to stay with their current advisor if they could do a better job of helping them plan for their expected health care costs and thoroughly explain the role of Medicare in their retirement.
"The good news is that consumers want help; presenting a big opportunity for advisors to step up in terms of education and preparedness in helping clients plan for health care in retirement," McGarry said.
Larry Barrett writes for Financial Planning.