Doctor: I’m afraid I have some bad news.
Patient: Give it to me straight, doc.
Doctor: You have at least 25, maybe even 35 more years to live.
The “downside” to an increase in life expectancy is an increase in the medical expenses required to keep our tickers ticking. For most retirees, healthcare expenses will represent the largest retirement expense they face. According to a March 2010 study by Fidelity Investments, a 65 year-old couple can expect to pay $250,000 in out of pocket medical expenses in their lifetimes; a 56% increase since Fidelity’s first study in 2002. If this trend continues, 65 year-old couples retiring in 2023 can expect to pay half a million dollars in out of pocket expenses.
Greater attention is beginning to be paid to this intersection of healthcare planning and financial planning. Life&Health Advisor interviewed Ron Mastrogiovanni, founder and CEO of Healthview Services (HVS). According to their website “HVS is a software firm that builds solutions for both the healthcare and financial services industries” that are a “combination of financial planning and health risk assessment tools.”
While there are some tools for consumers, HVS’ offerings are directed to financial institutions, financial advisors, and healthcare-related companies. A sample report from their web site, shows life expectancy of a hypothetical couple based on their answers to a questionnaire. It also gives a breakout of annual retirement expenses in 5-year increments per person, as well as annual time steps of total healthcare costs juxtaposed against project Social Security benefits.
While the sample report illustrates only healthcare costs versus Social Security, it references additional reports which, presumably, can reflect different retirement income outcomes based on a client’s portfolio, as well as non-healthcare retirement expenses. The sample report concludes with: “The next step in the process is for the advisor to suggest the appropriate investment product to address these costs.”
When you are talking about a product to generate a stream of income well into the future, you are likely talking about annuities. Indeed, in his interview with L&HA, Mr. Mastrogiovanni states that “annuities have to be looked at very seriously, especially those with guarantees.” (He also mentions a role for bonds and the potential for mutual fund products.)
While I think it is the responsibility of advisors to be product agnostic, it is also my belief that mortality-contingent products are one product class that is generally under-utilized, due in large part to the difficulty in getting many investors over the hurdle of “the check stops when your pulse does.” Though I am not familiar with HVS’ solutions beyond what I have read on their web site, tools that help investors understand the expense and income cash flows (and their drivers) they might expect in retirement are “hands on” educational opportunities that at least give investors a basis for evaluating their options.
If investors don’t like any of their options for meeting their retirement healthcare expenses, investors could also try to reduce their expected NPV. Hang gliding anyone?