Financial Advice, is it misinformation or something more sinister?
Survey after survey confirms that one of the most major concerns investors have is planning for their health costs in retirement, and rightly so.
With legislative changes coming from both Congress and the President, the course of this expense that everyonemust have has taken some drastic turns in the not so distant past.
Some of the changes have altered not only the overall costs of this expense (such as being penalized for having too much income, or the threat of debts possibly being passed to the next generation if not planned for accordingly), but the biggest change in the last 25 years is that these costs are now mandatory.
Judging by how the financial industry has reacted to not only this cry for help from the general public, but also in how it assists those that it has a fiduciary responsibility to protect would make it seem as if the industry on the whole is somewhat misinformed to the harsh realities of this “new health order” or could it be something more sinister?
Recently, the Employee Benefit Research Institute (EBRI) released a study titled “Utilization Patterns and Out-of-Pocket Expenses for Different Health Care Services Among American Retirees”, the sentiments of which were reported by both Bob Powell of USA Today and Glenn Ruffenach of the Wall Street Journal.
The study breaks down out-of-pocket health costs and where they may be leading by “targeting the more predictable health care expenses in retirement for older Americans (ages 65 and above) from the less predictable ones.”
The study then goes on to state that the data shows “that recurring health care costs remain stable throughout retirement. The average annual expenditure for recurring health care expenses among the Medicare-eligible population was $1,885.Assuming a 2% rate of inflation and 3% rate of return, a person with a life expectancy of 90 would require $40,798 at age 65 to fund his or her recurring health care expenses”.
Surprisingly, both Mr. Powell and Mr. Ruffenach appear to take this data without question, but is this data correct, or is it misleading? Or even flat-out false? Shouldn’t two financial professionals who have a background in retirement, who write for publications that educate the general public and financial advisers question this at all?
Again, the government has dictated that everyone must have health coverage or else, and in retirement (for those that are 65 and older), this means that everyone must have Medicare.
Wouldn’t the premiums for health coverage that every person has to have be recurring as well, and wouldn’t the two retirement specialists from USA Today and the Wall Street Journal also understand this too?
But this is not the only issue with the report or what the financial industry as a whole has been telling investors. The larger issue is how these costs have inflated throughout the last four decades, and where they are projected to head.
Medicare premiums, at least Part B, have inflated at well over 7% since inception with a projection rate of at least 5.70% per the Medicare Board of Trustees’ calculations, while Part D premiums are on pace to inflate at over 5.8% through at least 2028.
The other costs, the ones that EBRI, Bob Powell, and Glenn Ruffenach commented on as being only 2%, have actually inflated by at least 4.5% according to the Bureau of Labor, and are expected to inflate by 6.2% moving forward.
This 6.2% inflation rate has been determined by the Department of Health and Human Services which can also been seen on Fidelity Investments’ “Planning for Health Care in Retirement” presentation.
Where EBRI got that 2% inflation number is anyone’s guess, but it would appear that they may have missed what the federal government has been telling us for years: health costs are probably the biggest expense that the majority of Americans will face in retirement, and no matter what anyone tells you, they are mandatory as well.
Yes, you only have to accept Medicare Part A when officially retired, but please consider the fact that there are late enrollment penalties for delaying Parts B and D of Medicare, and they are not only compounding, but also perpetual.
If you delay enrolling in Medicare for any reason other than having access to credible insurance through an employer or spouse’s employer while gainfully employed, you will have recurring penalties for the rest of your life. So basically, it’s just like herpes, but without an entertaining story behind it.
Where the industry also seems to be misinformed is how high these costs can actually be. Though Fidelity Investments has done a terrific job at breaking down the costs of your health coverage in retirement, the firm, when speaking to the general public, is also on record, stating that the average cost of health care throughout retirement will only be $285,000 for the average American couple.
Here’s a simple question: how is this possible? Why is Fidelity stating this $285,000 number to the general public and when speaking to and for financial professionals it states that health costs for the average investor at age 65 will be about $10,326 per couple, while the expected rate of inflation is projected to be 6.2%?
It shouldn’t take a rocket scientist or toddler with an iPad to calculate what that cost will be for a couple who both live until age 85.
Using just a simple Excel spreadsheet and the assistance of a toddler with an iPad, it can easily be determined that the total will be $370,520.00 at today’s current premiums and an inflation rate of what the government is telling us it is going to be.
That’s a far cry from that $280,000 and even further cry from EBRI’s projection of just needing $40,000. We do hope you have an extra couple hundred grand under the mattress that you haven’t told anyone about.
But will you live until age 85? The probability, according to Social Security, is that in 2010 a 65 year old male can expect to live another 19.3 years (age 85) while a female should expect to live another 21.9 years (age 87).
With these life expectancies, the health cost average increases to a mere $402,131 which is slightly off from Fidelity Investments by just $117,000 and $360,000 from EBRI.
Please note that these costs do not include any surcharges that Medicare imposes on those that happen to earn too much income in retirement, as the penalties range from 40% to 220% more in premiums for Medicare Parts B and D. So much for “targeting the more predictable health care expenses in retirement”…
As stated before, it would appear that the financial industry (or at least the industry thought leaders) seems to be a little more than just merely misinformed on helping the general public plan for their own mandatory cost in retirement. The question that should be asked by everyone is why?
Is the goal of convincing more and more people to invest in the Stock Market more important to the financial industry’s bottom line than actually helping them plan for their only mandatory cost in retirement or is it even more sinister?