Plan for rising medical costs

When your clients envision old age, they may think about cruise vacations, leisurely visits to a market, and generally leading a healthy life. There is something fundamentally wrong with this picture. It doesn’t make allowances for the unpredictability of life.

The truth is, they could well be restricted to a wheelchair staring out the window, not quite sure where they are, and not being able to perform the basics of everyday life.

Post-retirement healthcare can be an unpleasant topic. That is perhaps the biggest hurdle to investors becoming better educated about medical costs. Many are concerned about the future cost of healthcare and nursing homes, especially those who are not well prepared financially for retirement.

“There is reluctance among people to acknowledge exactly how big this could be,” says Stephen Reichenfeld, vice-president, private wealth counsellor, Fiduciary Trust Company of Canada. “The challenge in having a desire to fund it is the unpredictability of the scale of the need.”

Planning pundits agree that healthcare costs and long-term care are big considerations when planning post-retirement income needs. But opinions differ on the scale.

“This is still open for debate, as any discussions will be based on the past and not the future as we all live longer,” says Tony De Thomasis, president, De Thomas Financial Corp. It’s difficult to apply hard numbers to it, but he ventures, “as a minimum they should have a plan to pay their drugs and medical, which may cost around $3,000-$5,000 a year and more as one gets older.”

Rod Tyler, a financial advisor with PEAK Investment Services in Regina, places a great deal of importance on a comprehensive written financial plan to eliminate surprises down the road. “Planning for the unexpected, but potentially devastating, effects of a healthcare crisis is a major consideration in our financial planning process.”

He addresses the issue of a critical illness or long-term healthcare event by projecting it into a financial plan, both with and without insurance coverage. “In this way, the client can see how quickly either a critical illness, or a long-term healthcare need, can destroy a financial plan.”

Increased longevity is another factor people struggle with when planning for their retirement. De Thomasis says the only way to pay for post-retirement healthcare needs is to work longer. “We were not meant to have a 30-year retirement vacation plan. The discussion should not really be on what they can save extra, but that they must work past age 60 or 65 in order to help pay for those expenses that they never thought of.”

An individual’s health will likely deteriorate as they get older. The problem is that many live in denial of this reality. The role of an advisor, therefore, becomes even more significant in discussing with clients the potential costs of long-term care, or treatment of a critical illness.

“The current level of understanding of the costs of healthcare in retirement is very low,” says Tyler. “Once a written financial plan is completed, these scenarios can easily be shown to a client. You can clearly show them what is missing.”

Even Canada’s worldclass healthcare system is no guarantee that the future cost of healthcare won’t eat into the retirement money in another bucket. Candians are becoming increasingly aware of that.

A study conducted by the Canadian Institute of Actuaries (CIA), a national organization of the actuarial profession, suggests that older Canadians doubt that the current public system will make the delivery of services available to them, and that they will have to rely on private delivery at a cost that is not known.

Tyler echoes the sentiment. “We need to help our clients understand that the public health system has a limit — it can only do so much until it collapses under its own weight.”

The respondents in the CIA study were concerned about having to fund additional healthcare expenses. “There was a lot of uncertainty surrounding their ability to get into, and pay for, long-term care facilities if necessary,” the report said.

There is little doubt that new medical solutions and procedures will continue to present themselves. The problem, however, is that it will cost a pretty penny to take advantage of these new possibilities.

As a result, educating investors about the need to save specifically for healthcare costs in retirement becomes a matter of exigency. One that must be addressed while investors are young, says Tyler. “Insure yourself for the large, although unlikely, risks of loss of health, or loss of life.”

He asserts the key is to get some sort of coverage. “The best solution is to put in place the most affordable coverage as soon as possible, and then the decision of term or permanent coverage can be made later.”

(08/17/10)