The Smart Take:
In this episode, Kevin turns the tables on a handful of common misconceptions about health care costs in retirement. Find out the truth about what health coverage and long-term care actually might cost and how you can factor them into your overall retirement plan.
This is the final part of this series we’re revisiting on Retirement Rules Gone Awry.
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Introduction: Welcome to Retire Smarter with Kevin Kroskey. Find answers to your toughest questions and get educated about the financial world. It’s time to Retire Smarter.
Walter Storholt: Retire Smarter here I’m Walter Storholt with Kevin Kroskey, Kevin’s the President and Wealth Advisor at True Wealth Design serving you throughout Northeast Ohio with offices in Akron and Canfield. You can find us online at TrueWealthDesign.com listen to past episodes of the podcast there. Read the blog, find out more great information about what it’s like to work with the True Wealth Design team and you’ve got a great website put together. Kevin, before we dive into the meat and potatoes of today’s program, as we say hello to you and bring into the show, you know some websites you go to and they have a lot of information on them, but you can tell a lot of its just sort of canned information like it’s the same on that website that it would be on a hundred different people’s websites or it’s the other direction. There’s hardly anything to poke around and learn on the website. What I love about you guys. You just have so much information on there that you’ve created different, you know, things that you can interact with, you know, online forms that you can fill out and find out more information about yourself. There are just all sorts of good stuff on the website. It’s, I know it’s something you’ve put a lot of time and effort into making a useful resource out of.
Kevin Kroskey: I appreciate that. Yeah. We certainly live in a digital age these days when we just redid it earlier this year and launched it and it’s been something I had wanted to do for a while. We actually have a new tool that’s going to be implemented here in the next week or two where it’s more of a financial health assessment that you can just go through and about five or 10 minutes, just put in some non-confidential information. You don’t have to put any identifying information and just, you know, answer some questions. They’ll kind of take you through a guided series of them and then it’ll give you an assessment about where you’re at based on the inputs that you provided. But then also, more importantly, it’ll give you some suggestions, some broad-based suggestions on what you can do to go ahead and get a better financial health score. So that’s something that we have been put on.
Kevin Kroskey: We do have a lot of content. I’ve been writing an article in our local monthly community papers since I think 2010 or 2011 now, and I write all that stuff myself. There’s a lot of canned stuff that you see what’s out there that end up on at least financial advisors’ websites. And I actually enjoy writing, particularly when I have the time. And I’ve been told by some that I’m pretty decent at it, so I like it. I do it and we have a lot to pull from. So we use that a lot of times with just kind of illustrating a point or concept of people that we’re working with. And it certainly helps to have that. And a library that we built up over the years.
Walter Storholt: It’s kind of a peek behind the curtain, but I work with a lot of financial advisors across the country and not a lot of them generate their own content, their own assistance, their own guidance, their own material to talk about with, you know, people who come to the website and interact. So it’s neat that you guys do a lot of that on the website. You do it, the podcast of course
Walter Storholt: Here and you do it with the blog and the articles that you write as well. So pretty neat to see. And we’re going to be kind of tapping into one of those articles that you’ve written before to use as our guide on the program. Today we’re going to talk about retirement a Rule Gone Awry. This is a series that we’ve been doing over the last several weeks here on the podcast and today’s attention will turn to health insurance and long-term care costs and you make no mistake about it in the title of that article on your website. Kevin, you say they will be exorbitant. So, there’s no hiding the fact that this is going to be a major issue for a retiree in the future.
Kevin Kroskey: Well, you know, so this is one of those roles and I’m not necessarily saying that they’re not going to be exorbitant and we’ll kind of peel that onion layer we get into the talk today.
Kevin Kroskey: But basically the premise is it’s probably not going to be as bad as what people think. Whenever people come into our office and they are a few years away from retirement or really getting serious about retirement, you know, they have a few general key concerns. You know, everybody’s different, but most people have some of these concerns. One of them is, Hey, can I go ahead and retire? Two, can I make my money last? You get these general questions in there. Health insurance, that’s something that because people have been on an employer-provided plan most likely for the entirety of their career and really haven’t had to worry about anything more than, you know, making a selection between a plan or two during open enrollment each fall. They really haven’t had to worry about it, but it is something that has certainly has been in the news quite a bit over the last several years and it’s something that’s unknown and whenever you have the unknown, your mind tends to go to a place of fear and fill your mind with those thoughts.
Kevin Kroskey: So it’s a big transition. Retirement is a big transition in itself. Going ahead and converting, you know, your savings into a paycheck is a big transition. Going from an employer provide a medical plan to something different is also a very big transition that people are concerned about and want to make sure that they make right.
Walter Storholt: We have got to pump the brakes here because you are spitting out such a different message than most folks would, Kevin. Most folks like to point out, you know the sky is falling mentality, right? Fear sells. Healthcare is going to be ridiculous into the future. You’re not raising those alarm bells at least to that level.
Kevin Kroskey: No, not at all. So there’s definitely some unknowns, but so Marissa Beyer, who is kind of my right hand here has been a Certified Financial Planner. And part of our firm for more than three years now and came to us after being at another respected Cleveland based financial planning firm for about 10 years and when she came here she was, you know, this was the first place outside of her prior employer that she had been since you graduated college and we were just kind of, you know, getting to know one another and learning how we do our planning process here.
Kevin Kroskey: And I thought I knew some of the Principals at the other firm and just assumed that our process was probably pretty similar and as we got to know one another and work together and go through a lot of cases for both new and existing clients that we served and we just found out that they were quite different. And one of the nice benefits of doing the approach that we go through, which I always like to say that I’m not, I don’t think I’m an original thinker, I like to go ahead and seek information. I looked for empirical or science-based information. I like to understand it and figure out how it can benefit our clients. And then implemented into the process that we take our clients through to help them make smarter decisions and live their lives better. But ultimately what it kind of boils down to is that we’ve found that clients can often retire two, three or four years earlier by coming here and following our process than if they’re going to say, I’ll just call maybe a normal financial planner that isn’t using this evidence-based approach about how people actually spend money, what costs are actually going to be like how that spending is going to change as the age. I never thought I was that special and I don’t think I am, but I think we just dot the I’s and cross the T’s and we do good work. At least that’s what we try to do on a daily basis.
Walter Storholt: So as we’re talking about this retirement Rule Gone Awry about healthcare insurance and long-term care costs, you know, being exorbitant and how maybe that’s not quite the case. How far of a difference do you believe there is between what you envision in the future versus what the prognosticators are saying out there? I mean, how big of a gap is there between what you think is going to be reality versus what they’re saying?
Kevin Kroskey: Yeah, I don’t even think there’s a gap. I think it’s more about how it relates to clients. So you know, I take the evidence-based approach, some of the common ones that are out there, Fidelity does a study every year about, Hey, how much money is a couple age 65 going to need to go ahead and pay all their healthcare costs throughout retirement? And one of the things that’s Fidelity does is, and I think this is as of the end of the year 2017 the most recent data, but it was $280,000 and so you hear a big number like that and you’re like, oh my gosh, that’s a lot of money. How am I going to afford that? Let alone all these other things that I want to do. I maintain my lifestyle and make sure that the money lasts at least a little bit longer than I do.
Kevin Kroskey: One of the things for us, and this is something that I noticed just through our experience and working with people. So you know, we incorporate tax planning and tax preparation in the work that we do. And once you make the transition from being an on employer-provided insurance and having your healthcare costs being deducted pretax from your pay and you’re no longer employed and now you’re buying health insurance on your own with after-tax dollars, those health insurance expenses could potentially be itemized and serve as a deduction on your tax return. So we would have our clients, you know, naturally, go ahead and track those expenses, whether that was for health insurance premiums, whether it was for copays, whether it was for, you know, other things that may be a qualified medical deduction. And what I noticed, and this back, we’ve been doing this since 2009, the tax aspect of our practice, I just didn’t see the high cost when people were itemizing.
Kevin Kroskey: And a lot of our clients that we serve are very detailed oriented people, a lot of engineers and you know, they love their spreadsheets. And when you have a pretty decent sample size and you see people tracking this and you don’t see these big numbers of, you know, $20,000 a year or $10,000 a year, it just got me really thinking about, well really what is an average cost for somebody that’s, you know, spending money on health care? Because if you’re doing this retirement planning process, I mean that’s one of the big questions, right? You know, how much is it going to cost? So you had to have some good data that was going into the plan for that. So that this got me started investigating what people were actually spending. When I noticed that what people were actually spending was a little bit different than some of the headlines that you saw out there.
Kevin Kroskey: So the Fidelity study, even though it’s $280,000 in today’s dollars, it really amounts somewhere around what Fidelity would say anyways, about $5,000 per year per person. So let me say that again. The $280,000 lump sum today for a 65-year-old, say with average life expectancy really amounts to about $5,000 per year per person. So we’re saying the same thing. All the Fidelity does in the study and what you see in the headline is they convert that $5,000 per year. And again, that increases with inflation over time, but they have that headline of $280,000. So conversely, let me put this in an apples to apples contrast. If you just take, say an average wage earner, a husband, and wife, and you convert the present value that today’s dollar value of their Social Security benefits, they would receive over the same life expectancy.
Kevin Kroskey: It will be closer to about $600,000 or so. Or you know, more than double with Fidelity saying it’s going to cost you. So I think it’s all in the presentation for one. So whether it’s you know, $5,000 per year per person, or whether it’s $280,000 in today’s lump sum, I’m not necessarily disagreeing with what Fidelity and some others are saying. I think it’s when you actually equated to, Hey, you know, here’s the client’s plan, here are the resources that they have. They have Social Security, they have these other things and you’re plugging that into the plan. It’s probably not as bad as you think. The other thing that goes along with that, and this has been something I mentioned in a couple prior podcasts when you look at retiree spending, you tend to spend more in your 60s tends to slow down in the 70s and it tends to kind of drop off at least on these more discretionary items in your 80s and as you age, the thing that doesn’t and thing that it goes the other way and actually consumes more is your health care.
Kevin Kroskey: But even though that’s the case, all the other spending items that you’re spending on in your 60s and still there, but maybe less so in your 70s and then really kind of fall off in your 80s the decline in those categories outpaces the increases in the health insurance bucket. So even if healthcare is increasing at a faster rate and going to comprise more of your spending as your age, there are other items that are going to be falling off at a faster rate than what health care is increasing. And I think that’s something that is really missed by most people.
Walter Storholt: I think it’s fascinating to have this discussion about health care, long-term care coverage goes hand in hand, obviously with that. And I think long-term care coverage, the old saying that I’ve heard is just, it’s just too expensive for most people to afford. It’s just not worth, you know, the expense that you’re going to have to put into it yet. It’s also a thing that can be hard to self-insure against. You kind of follow the same principles for health care versus, you know, that long-term care conversation.
Kevin Kroskey: Yeah. So a basic principle of insurance. Think about different types of insurance that you may own. Say your house, you probably have insurance on your house, even if it’s completely paid for. So say if you have, you know, you have a nice, you know, a few hundred thousand dollar home, the probability that you’re going to have a fire or something along the lines is pretty low. So the frequency of that risk or of that, the insurance people like to call it a peril, but of that risk is quite low. But the severity of the loss is quite high. You know, you can completely lose your house and have to rebuild plus the contents that you lost inside. So in cases like that where the probability of occurrence is low, but the severity of the loss is high, that is a really good situation for insurance. You can go ahead and get a bunch of homeowners, you can pool that risk and you can share that risk.
Kevin Kroskey: Very cost-effectively with the help of an insurance company to go ahead and provide the protection that you need. With health insurance, we all go to the doctor, right? We all go to the doctor, or at least we should mom, if you’re listening to this, you don’t go to the doctor enough, you need to go more often and get regular checkups. She’s probably not listening.
Walter Storholt: My mom too. We’ll need to send them this episode specifically.
Kevin Kroskey: Sounds good. So, for health insurance, we all, you know, again we should be going to the doctor and have regular checkups. So you know, just going to the doctor and paying a visit. If you did not have a copay plan, say you had a Health Savings Account. I know for myself we have Medical Mutual here and our contracted rate to go see a physician, a non-specialist was like $92 per visit.
Kevin Kroskey: You know, that’s not a very severe loss. Sure. Some may not like paying that out of pocket. They may prefer a $25 copay, but the basic principle of insurance doesn’t really hold up there. So I’d say something that’s more appropriate is having, you know, similar to those Health Savings Accounts if you will, where you do share and more that kind of front end risk and you are paying more out of pocket. But the insurance company is more providing that catastrophic coverage. That’s not how our insurance systems work. But when you look to other types of risk, that’s really where insurance, in general, tends to work well. And the same thing goes for long-term care that I just talked about. If you look at some of the actual usage statistics. So again, everything that we do, I really like to have kind of a science-based, you know, underpinning to it.
Kevin Kroskey: We just don’t want to talk about how we feel about something. We first want to talk to quantitatively and look at the evidence and then we can talk about the qualitative aspects of the decision, in which long-term care certainly has profound implications on both of them. But the probability that you’re going to need long-term care is quite high. You know, and these could be anything from home care, from independent living to assisted living all the way up to nursing home care. So there’s all these different levels and different places where you can have this care. However, the severity or the duration of the care tends not to be that long. Yeah. Everybody can probably think of somebody that maybe had a fall, an elderly person that they know that was in their life. Or their mom, dad, or a friend or grandparent, what have you.
Kevin Kroskey: They went in and they probably did a skilled nursing facility for some time and in Medicare speak, anyway, a skilled nursing facility, Medicare will cover that for the first hundred days. But beyond those a hundred days, it’s not covered and it’s more of kind of a chronic condition or chronic care and your major medical policy, your Medicare coverage will not provide for that. So that’s going to happen for most people, probably about 2/3 or between 2/3 and 3/4 of people at some point in their life. But when you actually look at this, think about it this way, you have some expenses that you’re going to have on a monthly basis, whether it’s you know, paying for food, for shelter, for heat and utilities and things along those lines. And if you went into a facility, so I’m not even talking about home care, but if you went into a facility, whether it’s independent living or all the way up to a nursing home, you would still have those costs.
Kevin Kroskey: You would still have some of those fixed expenses that are just being paid to that facility. Now certainly you may have different levels of care, you know you may have food built into it. We have some clients that are in these, what they call Continuing Care Retirement Communities and basically this can be these places where they go in and it’s independent living and they have continuing care all the way up through nursing home. The cool thing today is these, they call them “CCRCs” for short, but they’re quite fun places for a lot of people. They are very engaging in social activities. They have a lot of different things where people can actually get a lot of more enjoyment and make those social connections, which are so important to humans, a heck of a lot easier than if you were in your home. But whenever our clients get those yearly itemizations for their bills from the CCRC, because if it’s a pure health insurance expense, we can go ahead and deduct that from the taxes.
Kevin Kroskey: So they do provide these, and it’s not uncommon that you’ll see somewhere between like 25% to 40% going towards healthcare. So what does that imply? That implies that somewhere between 60% and 75% is not for healthcare. It’s for living there. It’s for these other things that we would have spent money on anyway, even if we didn’t have that care and if we were in our own home. So those are some important things to be mindful about because even if one of these care needs does manifest, you’re kind of just porting some of the money you’re already spending at your current home over to the facility. So that’s one. The other thing is when I look at this from a pure risk standpoint, if you go to a nursing home, you know that can certainly reach into the low six figures today. So if you’re talking about $100,000 per year or so, you’re still going to have some other expenses on top of that.
Kevin Kroskey: You know, that could be a risk. So I would say out of any of those types of care, that’s probably the one that we need to be most concerned about. Again, we’re all going to need home care or some sort of assisted living, or at least the vast majority of us are at some point in time. But the duration tends not to be that long. So if we go to the bigger risks, the nursing home, you know, the potentially $100,000 a year, what is the evidence actually show there? Well, if you think about for three years, and this was a study that was done some years ago, not all that long ago, but actually looking at these places and saying, you know, actual usage statistics, and so what’s the probability that somebody’s going to need three or more years in a nursing home? What the study showed, and there have been other studies that have come up with different methodologies and similar results, was that it’s only about an 8% probability for males and about a 15% probability for females.
Kevin Kroskey: Let me say that again. The probability that you’re going to be in a nursing home situation. So again, that highest level of care, the most costly and the greatest financial risk for three years or more is about 8% for males or 15% for females. So, if we’re doing a financial plan for somebody and we’re stress-testing their plan, and this is something that we always do, we always measure how long could you kind of self-pay for long-term care? And this is one of these things where all this is going to get integrated. So I’m going to kind of draw from some of our prior conversations here, but when does that care need likely to manifest well, you know, certainly there are some people in their 60s in a long-term care facility, you can have early onset dementia or something like that. But more often than not, you know, you’re talking about people in their 80s or what have you.
Kevin Kroskey: So in terms of spending, you know, Hey, the 60s are the go-go years are spending a lot 70s they’re slowing down 80s or the no-go years. So their spending’s really kind of declined over that time. And now you know, if they do have this long-term care need, we go ahead and we’re stress-testing now to go ahead and say the standard that we do is going to manifest at age 80 how long can your plan afford to self-pay for this risk? And if we see a client can go ahead and self-pay because really the only have kind of these, you know, core expenses that are around now. They’re not traveling around the world in their 80s they’re not, you know, going out to eat as much and are, you know, replacing their clothes in different categories that kind of fall off over time. But we really look and see how long can somebody afford to self-pay.
Kevin Kroskey: And that’s how we actually back into a recommendation of whether they need it or not. And I think that’s really important. Again, it’s not about just kind of looking at something qualitatively or having the traditional insurance salesperson approach of, you know, finding somebody that had this experience in your life and kind of getting you emotionally involved with it and kind of scared about it. It’s really looking at the evidence about what is the risk that’s really out there and can you go ahead or not self-insure that risk. And then after we’ve done all that, then we start talking about qualitatively, how do you feel about this? Because frankly, even though I can make a good case that you shouldn’t buy long-term care insurance, some people, not only do they have the resources for it, but they can have those resources. Go ahead and buy the peace of mind to know that they have it so everybody’s different. But we firmly believe that we first have to understand the math, the evidence, and the science, and go ahead and incorporate that into the advice that we’re giving the client specific to their plan and then we have the qualitative discussion. If you do it the other way around, you may feel good in some regards, but you’re probably going to be leaving a lot of money on the table and making some bad decisions.
Walter Storholt: It’s interesting because that’s one of those great examples where emotions can kind of factor into the equation a little bit. If you just need that peace of mind of having that coverage and it makes sense for your plan, then that might be why you have a different answer than somebody else who walks through the door in your Akron or Canfield offices here in Northeast Ohio and visits with the True Wealth Design team might be in similar situations, but you feel a little differently about, you know, your emotions toward this part of the planning process might lead to a different conversation and a different result in the end. And I think that’s kind of a neat little nuance to see if all of those are equal. There still might be different plans.
Kevin Kroskey: Yeah, completely. And I think a lot of people, you know, we talked about all these Retirement Rules Gone Awry. People take shortcuts. One, that’s how our brain works to some of this work is complex and may be difficult to do. I’m not only by yourself but even, you know, there’s a lot of financial people that are out there that don’t do this because a lot of financial people get paid to sell a product or to sell an investment. They don’t get paid to help you make smart planning decisions and really understand the evidence that’s behind you know, how your spending is likely to change as you age. You know, it’s something that we’ve found to be critical to make smart decisions. And if you’re doing a really good job on the planning process, then ultimately, you know, the client’s going to win and we’re going to win as their advisor because the way that we get paid is aligned in that win-win structure.
Kevin Kroskey: So it’s how we do it. You know, there are other good advisors that are out there, but there’s a lot of shortcomings. I can tell you in training a lot of advisors that have worked here over the years that, you know, it just takes a while to get people acclimated to the level of work that we do, that frankly, our clients need us to do for them. That’s why they hire us. So if we can help them make smarter decisions, if we can go ahead and understand this and relate it to them in simple terms and provide the actual, you know, financial and evidence-based recommendation. But then you know, certainly be mindful of the human side of the qualitative side and just talk about pros and cons and what’s going to help them sleep better at night. Now that we know how the financial
Walter Storholt: Ramifications are going to impact them, then they’re in a position, a very strong position to make a very clear and confident decision about what’s going to be best for them. We’ll make the recommendation, but they can go ahead and make the decision that’s right for them.
Walter Storholt: If you need help with your financial plan, want to talk about some of the Retirement Rules Gone Awry that we’ve discussed over recent podcasts and how it fits in with your situation. Give the team a call at (855) TWD-PLAN that’s (855) TWD-PLAN and that’ll put you in touch with the True Wealth Design team. You can also go to TrueWealthDesign.com and click on the “ are we right for you” button to schedule your 15-minute call with an experienced financial advisor with the True Wealth team. If you’ve missed any of the recent podcasts and you’d liked this topic of you know, a Retirement Rule Gone Awry, I encourage you to go back and listen to some of the past episodes that we’ve done recently where we tackle other retirement rules that aren’t quite right that needs some tweaking, that needs some discussion to further analyze them a little bit.
Walter Storholt: Kevin breaks down several for us over the last couple of episodes, so be sure to go check those out and don’t forget to subscribe iTunes or Apple podcasts if you will. Google Play or the Google podcast app we are on there as well and coming soon to Spotify, which is exciting as well. So, you can check us out on all those different resources or just online as well at TrueWealthDesign.com. Kevin, thanks for the help. As always, we’ll talk to you on the next podcast.
Kevin Kroskey: Sounds good, Walter.
Walter Storholt: Appreciate it. That’s Kevin Kroskey. I’m Walter Storholt. Thanks so much for tuning in. Talk to you next time on Retire Smarter.
Disclaimer: The information provided is for informational purposes only and does not constitute investment tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.