Healthcare Costs
in Retirement Guide
RETIREMENT
Merrill Lynch developed this guide to help you plan for
healthcare costs in retirement. Cost estimation is an
important component of planning. Just as important,
this guide is also designed to help you identify
income sources to cover costs and adjust your overall
expectation of retirement spending. Inside you will find:
n
step-by-step process on making adjustments to
A
average costs based on your situation
n
Projected healthcare cost inflation rates
n
Four possible ways to deal with uncertainty inherent
in estimating costs
n
A chart with pros and cons of various long-term
care solutions
Table of Contents
I.The Merrill Lynch Point of View on
Healthcare Cost Planning
II.View Annual Expenses as Part of
Your Overall Spending Plan
Identifying income streams to cover
costs and inflation as part of your annual
spending plan may make planning easier
for you.
III.Use Averages as a Starting Point
When Estimating Costs
Steps 1 – 4 in the Estimating Costs
section take into account your age,
health status, employer-provided benefits,
income and healthcare cost inflation to
refine your estimate.
IV.Incorporate Healthcare Costs into
Your Overall Plan
You may choose to reduce other expenses
or identify additional income sources to
help offset inflation in later years. You
also want to ensure you aren’t doublecounting some healthcare costs.
V.Understand Variability and Risks
Costs can vary based on your insurance
plan type and where you live. Your costs
may also change due to unexpected
health issues or legislative changes.
VI. Plan for Long-Term Care
It is important to have a plan for possible
long-term care. There are many ways to
address the issue, and a good plan may
incorporate a combination of solutions.
VII. Action Steps
Review a list of steps you can take when
planning for healthcare costs in retirement.
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I. Merrill Lynch Point of View on Healthcare Cost Planning
I. The Merrill Lynch Point of View
on Healthcare Cost Planning
The Importance
of Planning for
Healthcare Costs
Paying for healthcare costs in
retirement may be one of the
most daunting retirement planning
challenges you will face. These costs
may be a significant part of your
total retirement expenses and are
not optional. Planning for them is
complex because:
n
As these costs continue to rise
dramatically, it becomes hard to
predict the future.
n
You may have uncertainty about
your future health status and the
future health status of your parents.
n
Medicare and supplemental
insurance differ fundamentally from
employer-subsidized premiums
and coverage.
n
Ongoing changes to the national
healthcare system add uncertainty
and risk.
Merrill Lynch research indicates that most
people are concerned about healthcare costs.
This apprehension peaks in pre-retirement years,
with 76 percent of those aged 55 – 64 citing high
levels of concern.1 Despite the importance of this
topic, the information available may be of limited
use. The press and academic studies cite required
levels of saving that can seem overwhelming—
and these often exclude long-term care costs.
In addition, many retirees will find that their
actual costs are significantly different from
estimated averages.
To address this issue, Merrill Lynch has
developed the following roadmap to help you plan
for annual expenses:
Simplify your planning
by identifying income streams
to cover annual costs.
Estimate costs and use a relatively high
inflation rate to account for cost increases
over time.
Understand that costs may vary based on
your insurance plan type, unexpected health
issues, possible need for long-term care and
legislative changes.
In this guide, we’ll discuss this roadmap and
long-term care planning in more detail and provide
you with suggested action steps, as outlined in the
table of contents.
1
II. View Annual Expenses as Part of Your Overall Spending Plan
II. View Annual Expenses as Part of Your Overall Spending Plan
Identifying Income Sources to Cover Insurance
Premiums and Out-of-Pocket Expenses
The Employee Benefits Research Institute estimates
that a 65 year-old couple with median drug expenses
needs $158,000 to have a 50% chance of being able
to cover healthcare expenses in retirement, not including
long-term care costs; a couple with $271,000 in savings
has a 90% chance.2
These numbers seem overwhelming, but may be more
manageable than they appear because you won’t have
to pay insurance premiums and out-of-pocket healthcare
expenses as a lump-sum. In addition, if you created a
rough estimate for a retirement spending plan based on
your current spending levels, you have likely incorporated
some healthcare spending in your plan.
POTENTIAL SOURCES OF INCOME TO COVER ANNUAL HEALTHCARE COSTS
Income Streams
Work in Retirement/
“Second Act” Income
n
n
Employer Subsidized
Insurance
Income from Work
(full-time, part-time or
seasonal)
Assets
Investment
Income
Lifelong
Guaranteed Income
n
Dividends
n
Social Security
n
Interest
n
Pensions
n
Rental Property Income
n
Guaranteed Annuity
Payments3
Savings/
Principal
n
Tax-Free Withdrawals
from Health Savings
Accounts (HSAs)4
n
Sale of Investments5
n
Withdrawals from
Savings, Annuities and
Insurance5
With your Financial Advisor, you may look at the table above and see how it might apply to you. In particular, you may
consider income from work in retirement. You may be able to think of retirement as a new phase of life, or a “second
act,” which may provide an opportunity to work in an area that is meaningful, and/or a chance to obtain part-time or
seasonal work. In some cases, health benefits may be provided by your employer. In any case, a continuing income
stream for a number of years will help your nest egg last longer.
2
III. Use Averages as a Starting Point When Estimating Costs
III. Use Averages as a Starting Point When Estimating Costs
This section discusses four steps that will help you
estimate insurance premiums and annual out-of-pocket
expenses.
While articles about healthcare costs often focus on the
average cost, your actual spending may be much higher
or lower, based on factors such as age, health status,
income level and coverage from a former employer.
In a 2010 Bank of America Merrill Lynch survey, retired
individuals with investable assets of at least $100,000
who could estimate their expenses reported annual costs
ranging from under $3,000 to over $10,000.
The graph on the bottom left illustrates the wide variation
in retiree healthcare costs experienced by retirees.
36%
Step 1: Adjust Averages for Health Status and Age
Given the variation in costs experienced by retirees, it may
help to start with annual average costs adjusted for health
status and age, and then make adjustments for additional
variables such as employer-provided retiree benefits and
income. The chart on the bottom right shows costs for
today’s Medicare beneficiaries.
RETIREES AGE 65 – 75 ANNUAL
HEALTHCARE EXPENSES, JULY 2010
16%
29%
13%
35%
■ Under $3,000 ■ $3,000 – $6,000
■ $6,000 – $10,000 ■ More than $10,000
AVERAGE ANNUAL HEALTHCARE COSTS BY
AGE FOR INDIVIDUALS ON MEDICARE 2011
$6,000
$5,635
$5,535
$5,500
36%
16%
$5,000
29%
35%
$5,200
$5,100
$4,500
$4,660
$4,450
$4,760
$5,220
$4,860
$4,000
13%
$3,500
■ Under $3,000 ■ $3,000 – $6,000
■ $6,000 – $10,000 ■ More than $10,000
$3,000
Age 65
Age 70
Age 75
■ Excellent Health ■ Moderate Health ■ Poor Health
Bank of America Merrill Lynch Healthcare Survey, July 2010
Assumes Medigap Plan C. Includes vision, dental and hearing. Poor,
Moderate and Excellent health status based on self-reported data using
these specific categories. Estimates provided by HealthView based on
historical insurance data and actuarial projections, June 2011.
$10,000
$6,000
$5,500
$5,635
$5,535
$9,000
3
$8
III. Use Averages as a Starting Point When Estimating Costs
Retiring Before You or Covered Family Members are Age 65
If you plan to retire before you or a covered family member
is age 65, and you won’t have a retiree medical plan from
your employer, your costs are likely to be significantly
higher until you become eligible for Medicare.
While the chart below gives a rough idea of costs for a
private plan and out-of-pocket expenses, your actual costs
may be significantly higher or lower depending on:
nyour
pre-existing conditions
nlaws
that govern private insurance policies in your state
nthe
type of insurance coverage you purchase
AVERAGE ANNUAL HEALTHCARE COSTS BY
AGE, NO EMPLOYER SUBSIDY, 2011
$10,000
$9,425
$9,000
$8,000
$8,105
$7,600
$8,735
$8,220
$8,760
$8,105
$6,775
$6,000
$5,000
$4,000
$3,000
Age 54
Age 59
To complete Step 1: Note the amounts on the charts on
the previous page that are closest to your current age and
health status. If you plan to retire before age 65, you may
use both charts or use an insurance quote if you have one.
Step 2: Adjust for Employer-Provided Retiree
Coverage (if Applicable)
Retiree benefit coverage varies by employer type and firm
size. In 2010, 87 percent of state and local governments
offered retiree health benefits. In the private sector, larger
firms were most likely to offer retiree health benefits.
While very few small firms offered retiree health benefits to
active employees, 48 percent of firms with 5,000 or more
workers did so.7
On average, companies that offered retiree benefits
contributed about $1,800 towards medical insurance and
healthcare costs for former employees age 65 and older
and $3,600 for former employees prior to age 65 in 2010.
If you have retiree benefits that include family coverage,
your employer may offer a larger subsidy.8
$7,185
$7,000
Therefore, if you are thinking about retiring without
employer coverage before you are 65 years old, it may be a
good idea to get a quote for health insurance beforehand.
For more information on obtaining insurance coverage
before you turn 65, ask your Financial Advisor for the
Merrill Lynch “Pre-Medicare Health Insurance Guide.”
Age 64
■ Excellent Health ■ Moderate Health ■ Poor Health
Includes vision, dental and hearing. Poor, Moderate and Excellent health
status based on self-reported data using these specific categories.
Estimates provided by HealthView based on historical insurance data and
actuarial projections, June 2011.
Since the level of coverage varies widely, check with
your employer’s benefit administrator for specifics.
Also ask whether the availability and type of benefits
changes at age 65. Benefits for those age 65 and
older may or may not include:
na
health savings reimbursement account for retirees
na
subsidized plan supplemental to traditional Medicare
that may have a dollar cap on benefits
Definition of Out-of-Pocket Expenses:
It is important to note that traditional Medicare and Medigap plans do not generally cover hearing aids, routine
dental care and most vision care.6 Out-of-pocket costs in retirement include these and other healthcare costs not
covered by insurance, such as deductibles, co-insurance and co-payments.
nDeductibles:
4
the amount you pay before your insurance coverage starts
nCo-insurance:
percentage of care you pay for after you meet your deductible
nCo-payments:
a flat fee for services or drugs that is usually paid in addition to co-insurance
III. Use Averages as a Starting Point When Estimating Costs
naccess
to a group Medicare Advantage plan as an
alternative to traditional Medicare that may be
subsidized by the employer
nprescription
drug coverage
Employers may eliminate, cut back or change benefits
in the future. According to a 2011 employer survey by
Towers Watson/National Business Group, one of the most
common changes that employers are planning for 2012 is
shifting from employer plan sponsorship and subsidies to
health savings accounts.
If your employer contributes to a retiree health savings
account instead of offering an employer-sponsored plan
or subsidy, that will still allow you to offset some medical
expenses in a way that is tax advantaged. You may also
be able to save for future healthcare expenses if you don’t
spend down the account each year.
When planning, recognize that dollar caps on benefits,
a shift to health savings accounts and other plan changes
are likely to limit your employer’s liability and future cost
sharing. This may result in you paying a higher percentage of
your total healthcare costs as you age or if you experience
an unexpected health condition. To account for this, you
may want to lower the estimated amount of your employer’s
subsidy. It is also important to examine your insurance
options and policy limitations.
See the chart below to get an idea of the changes
employers are contemplating.
To complete step 2: Note your estimate of how much
your employer may reduce your healthcare costs at the
start of your retirement. If you know that your employer
provides benefits for retirees, you may choose to make an
estimate of about $1,800 per year for ages 65 or older
and $3,600 for years prior to age 65, or you may choose
a lesser amount if you are unsure. Given the wide variation
in benefits, information from your employer’s benefit
administrator will allow for a more accurate estimate.
Step 3: Adjust For Income Level if You Expect to Have
Relativity High Income in Retirement
Currently, less than 5 percent of individuals enrolled in
Medicare pay incremental premiums due to their income
level, but this is projected to increase to 14 percent of
those enrolled in Medicare by 2019. This is because the
income thresholds are not scheduled to be adjusted for
inflation until 2019.9
Medicare Part B (medical insurance) and Medicare Part D
(prescription drug coverage) premiums vary by income
level. If you have Modified Adjusted Gross Income
(MAGI) above $85,000 ($170,000 for married couples
filing jointly), your premiums will be higher than for other
Medicare beneficiaries.
Depending on your income, this may result in an increase
in Medicare premiums ranging from approximately $700
per year to nearly $3,900 per year in 2011.10
COMPANIES THAT OFFER RETIREE HEALTH BENEFITS: PLANNED CHANGES IN 2012
26%
Cease employer plan sponsorship
25%
Convert health subsidy to health savings account
Start facilitating access to plans
23%
Eliminate employer-managed prescription drug coverage
23%
20%
Make changes to plan subsidy
14%
Offer retiree medical savings account
Add a dollar cap on benefits
8%
Shaping Healthcare Strategy in a Post-Reform Environment 2011, Towers Watson/National Business Group on Health. The survey was completed by
588 employers with at least 1,000 employees between November 2010 and January 2011.
5
20%
Make changes to plan subsidy
III. Use Averages as a Starting Point When Estimating Costs
Offer retiree medical savings account
Add a dollar cap on benefits
To complete Step 3: If you expect your income to result
in increased premiums, estimate the increased cost using
the chart below.
ANNUALIZED INCREMENTAL PART B AND D
PREMIUMS BY INCOME LEVEL, 2011
$697
Single $85,000 – $106,999 or Married $170,000 – $213,999
$1,757
Single $107,000 – $159,999 or Married $214,000 – $319,999
$2,815
Single $160,000 – $213,999 or Married $320,000 – $427,999
$3,874
Single $214,000+ or Married $428,000+
Combines Part B and D incremental amounts. Social Security Administration,
Medicare Premiums: Rules for Higher Income Beneficiaries, 2011
6
14%
8%
Step 4: Adjust Your Estimate to Reflect Projected
Cost Increases Each Year
Healthcare costs are likely to rise more quickly than
overall inflation. Two factors contribute to this: a
possible decline in health at older ages and medical
cost inflation.
Most people experience declining health as they
get older. In 2011, average healthcare spending for
individuals of moderate health who are on Medicare is
projected to be $4,660 for 65-year-olds and $5,535
for those age 75.11
Medical costs have been increasing faster than
overall inflation. Since 1985, the overall consumer
price index (CPI) averaged 2.7 percent per year, while
medical inflation averaged 4.5 percent.12 Much of the
increase in healthcare costs is due to the widespread
adoption of new medical technologies in the U.S.
healthcare system.13
III. Use Averages as a Starting Point When Estimating Costs
65 YEAR-OLD MEDICARE BENEFICIARY PROJECTED HEALTHCARE EXPENSES
$30,000
$25,000
$20,000
$30,000
$15,000
$25,000
$10,000
$20,000
$5,000
$0
$15,000
2011
2015
2019
2023
$10,000
2027
2031
2035
$5,000
$0 data and actuarial projections, June 2011.
Assumes moderate health. Data provided by HealthView using historical insurance claim
2011
2015
Estimating
$20,000 Inflation and Future Costs
Projected costs at older ages are very high compared
to costs
today, so having available income sources and
$15,000
funds for later years is important. The projections below
are based on historical data and actuarial projections.
n7%
n9%
$0
annually
for Medicare beneficaries age 65
100%
80%
70%
$20,000
The chart above illustrates medical cost inflation for a
65-year-old. It includes a projection of declining health
at older ages.
The chart to the right shows projected costs for a 54
year-old with no employer subsidy for medical insurance
to age 64.15
60%
50%
40%
$15,000
30%
20%
$10,000
10%
0%
Age 65
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
annually for individuals age 54 without employer
subsidies pre-Medicare14
2023
54 YEAR-OLD, NO EMPLOYER SUBSIDY,
90%
PROJECTED HEALTHCARE EXPENSES
$10,000
Although there is some year-to-year variation by health
status and age, taking into account both aging and
$5,000
medical
cost inflation, average healthcare expenses
are projected to increase:
2019
$5,000
70
75
80
■ Women ■ Men
$0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Assumes moderate health. Data provided by HealthView using historical
insurance claim data and actuarial projections, June 2011.
To complete Step 4: Adjust your estimate for inflation
each year. You may choose to use projected rates of 9%
pre-65 and 7% per year post 65.
7
85
IV. Incorporate Healthcare Costs into Your Overall Plan
IV. Incorporate Healthcare Costs into Your Overall Plan
bills to estimate out-of-pocket costs. Make any necessary
adjustments to your overall spending plan to ensure you are
not double-counting some of your healthcare costs.
ADJUSTING A SPENDING PLAN: A CASE STUDY
Jim and Sally developed a rough retirement spending
plan based on their current spending patterns. They
are making their plan more accurate by including an
estimate of annual healthcare expenses and using a
higher rate of inflation for these costs.
Today they both have employer-subsidized insurance.
nTheir
Once you have identified sources of income and estimated
your insurance premiums and out-of-pocket expenses, you
may think about how to address these costs as part of
your overall spending plan for retirement.
Funding Healthcare Costs in Later Years
If you plan to decrease discretionary spending when
you are older, the resulting savings can help fund
increased healthcare expenses in later years. Since
not everyone plans to travel and have a relatively high
entertainment budget early in retirement, this may or
may not apply to your individual situation.
If you don’t plan to decrease other spending later
in life, identify income sources you may tap to help
offset significantly higher costs that are likely in later
years. Your vision of the future will help you refine
your overall plan.
Avoid Double-Counting Some Healthcare Expenses
If you created a rough estimate for a retirement spending
plan based on your current spending levels, you may have
already incorporated some healthcare spending into your
plan. To account for this, you will need to estimate your
current healthcare costs. To do so, examine your paycheck
stub or insurance bill to see how much is going towards
premiums, and review your bank statements and credit card
8
share of the premium cost is about $116
a month each or $2,800 per year total
($116 x 2 people x 12 months).
nSince
they are both healthy, they estimate they
pay about $200 dollars a year in out-of-pocket
costs in a typical year.
nTherefore,
they currently pay about $3,000 in
healthcare expenses per year.
Jim and Sally have already factored about $3,000
a year for healthcare costs in their spending plan.
If they are going to add an estimate of retiree
healthcare expenses as its own budget item, they will
need to subtract their current healthcare spending
cost of $3,000 from their general expenses. This will
allow them to avoid double-counting some costs.
Hypothetical example for illustrative purposes only.
V. Understand Variability and Risks
V. Understand Variability and Risks
Some of the factors that influence costs are difficult to
pin down prior to retirement. In addition, estimates can
be inaccurate if there is a change in circumstances. To
address this, you will need to build some flexibility into your
plan. This section will alert you to some of the factors that
may present risks.
Cost Variation by Insurance Plan Type and
Geographic Region
There are two sources of variability in costs that are
difficult to estimate: plan type and geography. Since
Medicare Part D (prescription drug coverage), Medicare
Advantage (an alternative to traditional Medicare) and
Medigap (supplemental coverage) are offered through
private plans, premiums can vary widely by region and by
type of coverage.
If you are near retirement, near age 65 or older, and are
willing to spend some time and effort refining your cost
estimate, you may want to use the Medicare PlanFinder on
Medicare.gov. Otherwise, keep in mind that you may need
to make adjustments to your plan in the future.
For more information on Medicare, ask your Financial Advisor
for a copy of Merrill Lynch’s brochure “Healthcare Planning
in Retirement: Understanding Your Medicare Options.”
Medicare Funding and Political Risk
An aging population is likely to contribute to Medicare
solvency issues. In 2010, there were 3.5 workers per
Medicare beneficiary; by 2030 there are projected to be
only 2.3 workers for every Medicare beneficiary. This is
important because workers pay payroll taxes and income
taxes that support the Medicare system.16
There is a possibility that solvency issues may spur
legislative changes. It is difficult to project how this might
affect your costs in the future, especially since there is a
possibility that changes for those near retirement age may
be not as pronounced as changes for younger people.
Recommendation: Build flexibility into your plan. Given the
inherent uncertainty of cost estimates, you may want to
think about possible discretionary spending reductions in
case healthcare costs are more than you expected.
The Importance of Planning for Variation in
Costs from Year to Year
Because even the healthiest people are subject to
unexpected health issues, your healthcare costs are likely
to vary from year to year. It is critical to take these types
of events into account. You can do this by establishing an
emergency reserve fund, setting up a line of credit that
you will be able to pay back over time using your income
sources, obtaining adequate insurance and/or determining
how you may adjust your overall spending plan.
Establish An Emergency
Reserve Fund
Evaluate
Insurance Options
This may be incorporated
into an overall fund that will
help you handle all types of
unexpected events.
Get adequate coverage
when healthy and when
first eligible to avoid
penalties and pre-existing
conditions issues.
Planning for Unexpected Health Events
Consider Establishing
A Line Of Credit
Plan To Make Adjustments
To Your Spending Plan
If you will have income
sources to pay back a loan
over time, this may be an
option for you.
You may be able to cut back
on discretionary spending.
9
VI. Plan for Long-Term Care
VI. Plan for Long-Term Care
What is long-term care? Long-term care is needed
for assistance with activities of daily living, such as
walking, getting out of a chair or bed, eating, toileting
or bathing, either in an institutional setting or at home.
Long-term care is frequently related to a specific
accident, health issue or overall decline in health in
old age, including dementia.
The Importance of Having a Plan
2027
2031
Although not everyone requires long-term care, it is very
likely that you will need care if you live to an advanced
age. In addition, health conditions such as cardiovascular
disease and cancer increase the likelihood of needing care
at younger ages.17 Most importantly, in the event care is
needed, having a long-term care plan may help you feel
more secure, manage your financial situation, obtain quality
care for you or your loved one and relieve stress on family
care-givers.
2035
Likelihood of Needing Care
2011 ESTIMATED CUMULATIVE PERCENT CHANCE
OF USING CARE BY AGE
The chart to the left illustrates the chances that men and
women will need long-term care (home care, assisted living
or nursing care) at various ages past 65.
100%
nFor
a 65-year-old, the chance of needing care by age
75 is about 14% for men and 15% for women—about
one in seven.
90%
80%
70%
nThis
rises dramatically to 46% for men and 52% for
women by age 85.
60%
50%
40%
nMen
who survive to age 90 have a 70% chance of using
care at some point, and women have a 77% chance.
30%
20%
10%
0%
Age 65
70
75
80
85
90
95
■ Women ■ Men
Includes nursing care, home care and assisted living use in any year
from age 65. Assumes Survival. Derived from actuarial data provided by
HealthView, June 2011
10
When looking at these statistics, it is important think about
how long you may live. A 65-year-old woman in moderate
health has a life expectancy of 89, and a 65-year-old man
in moderate health has a life expectancy of 86.
VI. Plan for Long-Term Care
Types of Care
As seen in the chart below, the type of care needed varies
by age. Since the type of care used by age is very similar for
men and women, only the chart for women is shown.
nHome
care is most common for women age 75 and
under, although 8% of those that need care at age 75 use
assisted living and one quarter use nursing care.
nAt
ages 85 or older, nursing home care becomes much
more prevalant.19
IF CARE IS NEEDED: TYPE OF CARE BY AGE FOR WOMEN
67%
Age 75
45%
Age 85
8%
14%
25%
41%
FAMILY CARE-GIVING
Whether they plan to or not, many people rely
on family. The National Alliance for Care-giving
estimates that 19 percent of the adult population
provided care to someone age 50 or older in the
last year.18 The amount of care and stress it may
place on the caregiver varies widely, but most had to
make adjustments at work.
nNearly
half provided 1 – 8 hours of care per week,
35% provided 9 – 40 hours of care per week and
11% provided more than 40 hours of care per week
n29%
n74%
were employed while giving care (68% had
to make a workplace accommodation such as
coming in late, leaving early or taking time off)
n41%
Age 90
27%
18%
55%
provided care for more than five years
had help from a paid caregiver
nOne-third
found the emotional stress of care-giving
was high
■ Home Care ■ Assisted Living
■ Nursing Care
Data provided by HealthView using historical insurance claim data and
actuarial projections, June 2011. Note: Type of Care Utilized by Men by Age
is Very Similar (Within 2%)
How Long Might Care Be Needed?
The length of care needed is difficult to predict. In general,
women tend to use paid care longer than men. One possible
reason is women have longer life expectancies, and are less
likely to have a spouse to care for them at older ages.
For those who have Alzheimer’s or Parkinson’s, the length of
care is likely to be longer than average.20 One in eight people
age 65 has Alzheimer’s, as do half of people age 85 or
older. Most people survive an average of four to eight years
with the disease.21
Shorter or longer periods of care than the average are
feasible. 10 percent of people who move to a nursing home
will stay there five years or more. There also may be a
progression of care from home care to assisted living to
nursing care.22
AVERAGE LENGTH OF CARE BY TYPE OF CARE
4
$180,000 2.9
3
2.2
2
$160,000
$140,000
2.0
1.5$120,000
1
$100,000
1.5
1.2
$80,000
$60,000
0
Nursing Care $40,000Assisted Living
Home Care
$20,000
■ Women ■ Men
$0
National Manhattan, Topeka, Charleston,
Average
NY
KS
SC
Data provided by HealthView using historical insurance claim data and
■ Home Care ■ Assisted Living ■ Nursin
actuarial projections, June 2011.
11
■ Home Care ■ Assisted Living
■ Nursing Care
VI. Plan for Long-Term Care
Cost of Care
The paid cost of care varies widely by care type, geography
and individual facility. National average costs and costs for a
few selected locations are listed in the chart to the right.23
If you are planning for long-term care, you will need to
account for inflation. On a national level over the past
six years, nursing care and assisted living costs have
increased at an annual rate of about 4.5 percent and 6
percent respectively, while skilled home care costs grew at
a 1.4 percent rate.24 Assuming a 5.5 percent inflation rate
for all types of care, in 2031 the national average annual
costs would increase to about $120,000 for home care,
$114,000 for assisted living and $227,000 for nursing care.
Taking action to stay healthy for as long as possible may
be part of your plan. This is likely to lower annual costs
and improve your quality of your life. In addition to paying
attention to your health, your plan may include several
of the options shown below.
Potential Solution
n
n
n
Home equity
n
n
n
n
n
n
n
n
n
Continuing care
community (may supply
housing, healthcare
and social services)
12
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
No funding required
Familiar with caregivers
n
National
Average
Manhattan,
NY
Topeka,
KS
Charleston,
SC
Phoenix,
AZ
■ Nursing Care
Genworth 2011 Cost of Care Survey Data 4/27/2011. Provided by
HealthView, June 2011
Pros
Self-funding using
investments and
savings
Life insurance policy
with long-term care
(LTC) policy rider25
$160,000
■ Home Care ■ Assisted Living
Cons
n
n
Traditional long-term
care insurance25
$180,000
$0
Developing Your Plan
Family and friends
provide care
2011 LONG-TERM CARE COSTS
FOR ONE YEAR OF CARE
No qualification
No insurance costs
Only pay for care received
n
You may already have equity in
your home
No insurance costs
Only pay for care received
n
Generally provides the most
coverage per premium dollar if
care is needed
Ability to leverage premium
dollars if care is needed
n
Policy may allow recovery of
premium death benefit to heirs if
LTC benefit is not used
Ability to leverage premium
dollars if care is needed
n
In some contracts, a place to
live and care may be provided if
funds are insufficient
n
n
n
n
n
n
n
Considerations
May cause stress and hardship
for caregivers in some situations
Family may not live nearby
n
Even if they provide some care,
your family may need paid help
in some situations
equires significant resources
R
May affect plans to leave
assets to heirs, including a
surviving spouse
n
May be combined with other
options: you may choose to
partially self-fund
Requires income source to repay
home equity loan/line
Real estate market may decline
when you need care
n
Plan ahead to put yourself in
a position to use home equity
when needed
ealth qualifications
H
Premiums require current funding
May not use benefits or fully
utilize benefits
n
Must have adequate funds
to pay premiums and
premium increases
Health qualifications (although
generally less than for traditional
long-term care)
Premiums require current funding
n
Compare benefits with possible
need for care
Relatively high purchase price
and monthly payment required
Must be in fairly good health
to join
n
Financial stability and
management of the community
are very important
VI. Plan for Long-Term Care/VII. Action Steps
Government Programs
In addition to potential solutions outlined on the prior page,
you may be wondering about government programs. Here’s
a brief summary:
n
Medicare:
Medicare generally doesn’t pay for longterm care expenses such as custodial care to help with
activities of daily living. A limited benefit may be provided
for skilled nursing care if medically necessary.
n
Medicaid:
Asset and income levels to qualify vary by state,
but are generally very low. There is also a “look back
period” at assets spent in the five years before qualifying,
to discourage transfer of assets to family members.26
VII: Action Steps
As you plan, you may find these action steps helpful.
Action Steps for Everyone:
n
Consider a “second act.” Paid work in retirement,
whether from cycling in and out of work, working at a
more fulfilling position, or working in a less stressful
occupation will generate income that may offset
healthcare expenses. Some jobs also offer health
insurance benefits.
n
Take
care of your health. People in good health tend
to have lower annual expenses for healthcare. Good
health is also likely to enhance your ability to work in
retirement and generate “second act” income and,
more generally, to do the things you want and to lead
an active lifestyle.
Action Steps for Pre-Retirees and Retirees:
n
Use Steps 1 – 4 in the Cost Estimation section as
a starting point to estimate healthcare costs in
retirement. Start with an average, based on your age
and health status, then adjust for employer subsidies
and income level. If you created a rough budget that
includes healthcare expenses, ensure you aren’t
double-counting expenses.
n
Realize
that your annual healthcare expenses are
likely to increase at a rate that is significantly higher
than overall inflation. Factor in higher expenses as
you get older with an estimated inflation rate for
healthcare costs.
n
CLASS
ACT: The CLASS ACT, or Community Living
Assistance Services and Supports program, is a national
voluntary insurance program to be financed by premium
contributions of working individuals. To receive benefits,
premiums must be paid for at least five years. The
program will pay benefits of at least $50 per day, but is
not designed to pay for all long-term care costs. Details
of this program are scheduled to be set by October
2012, when enrollment is expected to begin.27 Since
the CLASS ACT is not yet in place, its implementation
remains uncertain.
nPlan
for variation in expenses from year to year that
may result from an unexpected illness or injury. An
emergency savings reserve, adequate insurance, a line
of credit and a plan to adjust spending are some ways
to handle unexpected events.
nDevelop
a plan for possible long-term care needs.
Review your options and consider that you may be
able to use more than one solution to pay for longterm care costs.
nTalk
to your Merrill Lynch Financial Advisor about
incorporation of healthcare costs into your retirement
spending plan.
Action Steps for Younger Investors:
n
Save for your overall retirement goals. Consider
increasing contributions to tax-advantaged options,
such as a 401(k) or IRA. Given uncertainty about
medical expenses far into the future, you may want
to focus on saving diligently for your overall retirement
goals. Time is on your side: compound interest and
investment returns can help you build a nest egg.
nIf
you have access to a high-deductible healthcare
plan, evaluate funding a Health Savings Account
(HSA). HSAs allow for tax-advantaged savings and
withdrawals for healthcare expenses.
n
Consider
disability insurance. If you are unable to
work, disability insurance will allow you to have a
continuing income stream to replace part of your
income for a period of time. This will make it easier for
you to pay any medical bills, avoid financial problems
and stay on track for all your financial and life goals.
13
This material should be regarded as educational information on healthcare costs and is not intended to provide specific healthcare advice. If you have
questions regarding your particular situation, please contact your legal or tax advisor.
1
Merrill Lynch Affluent Insights Survey, July 2011
2
EBRI Issue Brief No. 351, Funding Savings Needed for Healthcare Expenses for Persons Eligible for Medicare, December 2010
3
Guarantees are subject to the claims-paying ability of the issuing insurance company.
4
Funds withdrawn for non-qualified purposes prior to age 65 are subject to ordinary federal income tax, plus a 20% additional tax.
5
Before initiating a sale or withdrawal, be sure to consider any taxes, penalties and expenses associated with the sale of an investment or withdrawal.
6
Centers for Medicare and Medicaid Services, Medicare and You 2011; Centers for Medicare and Medicaid Services, Choosing a Medigap Policy: A
Guide for People with Medicare 2011
7
Kaiser Family Foundation, Medicare Chart Book, Fourth Edition, 2010 and Kaiser/HRET Survey of Employer Sponsored Health Benefits, 2010
8
Derived from 2010 Healthcare Cost Survey, 21st Annual U.S. Results Report, Towers Watson
9
Kaiser Family Foundation Medicare Issue Brief: Income-Relating Medicare Part B and Part D Premiums, December 2010
10
For those who are married filing separately, incremental Part B and D premium costs in 2011 are: $2,815 for those with MAGI of $85,000 - $129,000
and $3,874 for those with MAGI greater than $129,000. Details are in: Social Security Administration, Medicare Premiums: Rules for Higher Income
Beneficiaries, 2011
11
Extrapolated from actuarial data supplied by Healthview to Bank of America Merrill Lynch, June 2011
12
US Bureau of Labor Statistics, CPI Detailed Report for March 2011, Table 2
13
Congressional Budget Office, “Technological Change and the Growth of Healthcare Spending,” January 2008
14
Assumes Medigap Part C. Derived from actuarial data supplied by Healthview to Bank of America Merrill Lynch, June 2011
15
Actuarial data supplied by Healthview to Bank of America Merrill Lynch, June 2011
16
Kaiser Family Foundation, Medicare Spending and Financing: A Primer, 2011
17
Actuarial data supplied by Healthview to Bank of America Merrill Lynch, June 2011
18
Based on a survey of 1,639 adults by the National Association for Caregiving in collaboration with the AARP, 2009. Caregivers were asked if they
provided unpaid care to someone age 50 or older in the past twelve months.
19
Actuarial data supplied by Healthview to Bank of America Merrill Lynch, June 2011
20
Actuarial data supplied by Healthview to Bank of America Merrill Lynch, June 2011
21
Alzheimer’s Association Fact Sheet, March 2011
22
University of California, Planning and Paying for Long-Term Care, Publication 8283, February 2010
23
Genworth “2011 Cost of Care Survey,” 4/27/2011. Home care assumes skilled nursing care, 44 hours per week; assisted living assumes 1 bedroom;
nursing care assumes private room. Costs by specific area are often available on long-term care insurance web sites.
24
Genworth 2011 Cost of Care Survey, 4/27/2011
25
Long-term care insurance coverage contains benefits, exclusions, limitations, eligibility requirements and specific terms and conditions under which the
coverage may be continued in force or discontinued. Not all insurance policies and types of coverage may be available in your state.
26
Medicare.gov website, June 2011
27
Kaiser Family Foundation, Focus on Health Reform 2010, Health Reform and the CLASS ACT, April 2010
ARP3D5U4
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