Healthcare costs in retirement Preparing today to protect your wealth tomorrow

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1 Healthcare costs in retirement Preparing today to protect your wealth tomorrow

2 Preparing for healthcare costs to protect your retirement lifestyle Merrill Lynch Wealth Management makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated ( MLPF&S ), a registered broker-dealer and member SIPC, and other subsidiaries of Bank of America Corporation ( BAC ). Investment products offered through MLPF&S and insurance and annuity products offered through Merrill Lynch Life Agency Inc.: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value Are Not Deposits Are Not Insured By Any Federal Government Agency Are Not a Condition to Any Banking Service or Activity Merrill Lynch Life Agency Inc. is a licensed insurance agency and a wholly owned subsidiary of BAC. 2

3 Like many people, you ve worked hard over the years to build your wealth for a more secure future. But have you taken time to consider the effect that healthcare costs could have on your portfolio and the fact that these costs could rapidly deplete your savings and adversely impact your retirement income? At Merrill Lynch, we believe that whether you re approaching retirement or already well into your retirement years, protecting your wealth is just as important as building it. Properly preparing for healthcare costs, both those you expect and those that are less predictable such as a need for long-term care, will help improve the likelihood that your assets and your retirement lifestyle last a lifetime and beyond. Providing solutions to help meet your healthcare challenges We hope to provide you not only with a clearer understanding of the healthcare cost challenges that you will likely face over the coming years, but more importantly to offer solutions that will help you address those challenges by: n Estimating your expected out-of-pocket healthcare expenses such as insurance copays and Medicare premiums; n Creating contingency plans for unexpected expenses such as long-term care; and n Working closely with your Merrill Lynch Financial Advisor to protect your wealth by integrating healthcare costs into your overall retirement plan. 3

4 The challenge Estimating healthcare costs to incorporate into your overall plan The healthcare cost continuum Over the last two decades, the life expectancy of Americans has risen dramatically. Like many things, however, longevity can be a double-edged sword. Because you can expect to live longer, you ll need to save more to avoid outliving your retirement savings or using assets you intended to leave as a legacy for your heirs. And along with advancing age, also comes an increased likelihood of a major costly health event. While over time expected healthcare expenses can slowly drain retirement savings, a significant health event can quickly derail all your retirement plans. Without proper preparations, the only available source to pay those expenses will be your retirement assets. The common belief that Medicare will cover the vast majority of healthcare expenses in retirement is simply not the case. A recent study by the Employee Benefits Research Institute estimates that the average healthy 65-year-old couple that retired in 2012 would need around $283,000 to have a 90% chance of covering medical expenses throughout retirement, with a risk of that amount being much higher. 1 These costs include copays and premiums for Medicare Part B and Part D, Medigap and retiree health insurance, and other services not covered by Medicare such as dental care, vision care and hearing aids. Add to that the risk of needing long-term care in a nursing facility at a cost of hundreds of thousands of dollars, and the amount can quickly deplete your retirement assets. Self-funded medical insurance for early retirees Medicare election choices Medigap insurance Long-term care insurance Do you feel prepared for all the potential healthcare costs that could impact your retirement savings and income? Have you considered the effect these might have on the legacy you hope to leave for your children or grandchildren? With proper preparation, these risks can be greatly minimized or even eliminated. But in order to effectively prepare, you first need to be able to accurately estimate your expected healthcare costs not only from the time when Medicare kicks-in at age 65, but especially if you are considering an early retirement. 4

5 Exploring coverage options Health insurance expenses before age 65 By 2027, annual medical costs will likely consume more than 60% of the average individual s Social Security income. 2 If you re considering retirement prior to turning age 65, it s important to plan to self-fund medical insurance premiums during the years until Medicare coverage begins. There are a variety of options available to help you bridge the gap, all of which may increase in cost over time, and should be factored into your retirement income plan. Employerprovided coverage n Some firms will allow retiring employees (not yet Medicare-eligible) to continue coverage through the employer s plan. n Coverage may be reduced or premiums increased. COBRA n Companies with 20+ employees must offer an extension of benefits (up to 18 months) under COBRA. n Can be very expensive since you re required to take on the full, unsubsidized cost of benefits. Individual health insurance n You can opt to purchase an individual policy through a private insurer to cover you and your family. n Premiums vary widely based on insurer and plan details. n For a healthy individual, may be more affordable than electing COBRA coverage. 5

6 Estimating expected costs Health insurance expenses from age 65 and on Approximately 70% of Americans who are currently age 65 or older will need some type of long-term care. 3 Even without the threat of a serious illness, out-of-pocket medical expenses are likely to take a significant bite out of your retirement income. The cumulative effect of deductibles, coinsurance and medical expenses not covered by Medicare, can quickly become the single largest drain on your retirement income. What does Medicare cover? Plan Coverage Out-of-Pocket Costs Part A (Hospital Insurance) Inpatient hospital, skilled nursing care, home healthcare, and hospice care Deductibles, coinsurance and copays Part B (Medical Coverage) Part C (Medicare Advantage) Doctors visits, outpatient care, other medical services Private alternative to Medicare Covering Parts A, B and D Monthly premiums, deductibles, coinsurance and copays Variable costs determined by Insurer Part D (Prescription Drugs) Brand name and generic drugs Monthly premiums, deductibles and copays What doesn t Medicare cover? Although Medicare covers most major costs with the exception of vision and dental care, the associated out-of-pocket expenses including monthly premiums for certain program components, deductibles and copayments can quickly mount. A Medigap supplemental insurance policy can be purchased to alleviate many of the out-of-pocket deductibles and copayments. But even with supplemental insurance, the most glaring gap remains Medicare does not cover most of the potentially significant costs associated with long-term care. Not surprisingly, healthcare costs experienced by retirees vary widely. As the chart on the next page indicates, average costs are primarily driven by two variables your age and the overall status of your health. To see an average annual cost, identify the cost that is closest to your current age and health status in the chart as a starting point. 6

7 Average Annual Healthcare Costs by Age, No Employer Subsidy, 2011 $6,000 $5,500 $5,000 $4,500 $4,000 $3,500 $3,000 $5,535 $5,635 $5,100 $5,200 $5,220 $4,450 $4,660 $4,760 $4,860 Age 65 Age 70 Excellent Health Moderate Health Poor Health Age 75 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 $30,000 The rising $25,000cost of healthcare $20,000 Over $6,000 the past thirty years, medical cost inflation has been rapidly $15,000 $5,535 $5,635 outpacing $5,500 the overall rate of inflation. In fact, since 1982 the overall cost $10,000 $5,100 of living has a little more than doubled, while $5,200 the costs $5,220 $5,000 associated with $5,000 medical care $4,450 have $4,660 $4,760 $4,860 nearly quadrupled. $4,500 $4,000 $ This higher inflation means that if you re an average 65 year-old with $3,500 moderate health who today is paying about $5,000 a year, you can expect to $3,000 pay close to $10,000 Age 65a year at age 75 and Age 70 nearly $25,000 a Age year 75 by the time Excellent Health Moderate Health Poor Health you reach age 89 (see chart below). 65 Year-Old Medicare Beneficiary Projected Healthcare Expenses $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $ Assumes moderate health. Data provided by HealthView using historical insurance claim data and actuarial projections, June Anticipating future costs is unpredictable, but a good rule of thumb is to factor in a 9% annual healthcare cost increase for the years prior to age 65, and a 7% annual cost increase from age 65 onward. Your Financial Advisor can help you calculate these expected costs and identify potential income sources to fund them. 7

8 Preparing for contingencies Bridging the long-term care cost gap What constitutes long-term care? Long-term care consists of those services needed to assist you with the 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. who pays for long-term care? 3% 3% 9% 22% 23% 40% n Medicaid 40% n Medicare 23% n Out-of-Pocket 22% n Private 9% n Other Private 3% n Other Public 3% Medicare only covers a portion of costs associated with short-term rehabilitation. Medicaid eligibility requires patients spend down their personal assets until they fall below their state s minimum amount. A large portion of costs are paid out-ofpocket or from other private sources (34%). Source: The Kaiser Commission on Medicaid and the Uninsured, What are the costs associated with long-term care? n Approximately 70% of individuals over the age of 65 will likely need some sort of long-term care. 3 n The average stay in a nursing home is about 2.2 years for men and 3.7 years for women. 3 Considering that the average annual cost for a nursing home stay is $81,030 4 (as high as $232,505 4 in some states), and that the average cost for full-time care (12 hours/day) by a home health aide is $91,000 3 a year, it becomes clear how long-term care costs can quickly wipe out a lifetime of savings. 8

9 Options for funding long-term care costs There are several options for funding long-term care expenses. Your Financial Advisor can assist you in exploring each and identifying the appropriate solution for your particular circumstances. Approaches to long-term care funding Self-insurance Traditional long-term care insurance You may decide to self-insure for long-term care expenses by using your own personal assets to pay for care or by depending on family members to provide assistance. Long term care expenses may deplete assets earmarked for other living expenses or desired to be left as a legacy for your heirs. You may purchase a dedicated long-term care insurance policy. Policies can be designed to cover care expenses in a variety of ways including types of services covered. Payments may be structured as reimbursements or as a set amount. Annual premiums may increase and must be paid to keep the insurance protection in place. Your Financial Advisor can work with you to determine the type of coverage that is right for you. Among the questions he or she can help you explore are: n What services do you want to cover? n How do you want to receive benefits? n Do you want to protect your benefits against inflation by providing for more coverage later on? n Do you want coverage for yourself only, or for both you and a spouse? Hybrid life insurance with long-term care benefits Permanent life insurance with a long-term care benefits rider You may purchase a hybrid life insurance policy with long-term care benefits. These policies are purchased through a single premium payment and establish a set benefit amount for long-term care expenses. They provide reimbursements for qualified long-term care expenses, an income tax-free death benefit if the long-term care benefit does not deplete it, and a money-back guarantee through a return of a premium rider. You may purchase a permanent life insurance policy with a long-term care benefit rider. These policies are typically purchased with annual premiums. The rider provides reimbursements for qualified long-term care expenses and an income tax-free death benefit if the long-term care benefit does not deplete it. n How long of a benefit period do you need? n What benefit amount do you need? Benefits of long-term care insurance n Long-term care insurance can pay for professional assistance if you become physically or cognitively impaired. n It can help pay for care in your own home, in a specialized care unit or in a group facility, depending on your healthcare needs and your individual situation. n It can also help protect your assets against depletion, thus preserving you and your family s overall financial picture. 9

10 The skills and experience to help you craft an appropriate strategy At Merrill Lynch, we believe that protecting your wealth is just as important as building it. We work with clients of all ages to help effectively address both the expected and unexpected costs associated with healthcare expense planning exploring strategies designed to hedge against risk, ensure that your retirement spending plan incorporates solutions to help meet rising healthcare costs, and most importantly, help protect your hard-earned assets from the devastation that can result from a serious healthcare event. Your Merrill Lynch Financial Advisor can help you address the complex healthcare issues that can impact your retirement outcome, adapting to your specific needs, circumstances and expectations by: n Estimating annual costs, including growth of those costs over time; n Reviewing options for funding long-term care expenses and helping you determine the right option and the right amount for you; and n Most importantly, incorporating these costs into your overall retirement plan to help ensure that the appropriate amount of income and assets are dedicated to funding these expenses. There s no such thing as too soon As with any type of planning, the sooner you begin to prepare for healthcare costs, the more options you ll likely have at your disposal and the less challenging the process will be. The risk associated with ignoring the impact both planned and unexpected healthcare costs can have on your retirement savings and income, and in turn, your desired lifestyle and your legacy. Together, we can explore various what if scenarios to help you prepare for planned and unexpected healthcare costs and then develop financial strategies to help you address the potential impact healthcare costs can have on your financial future. Working with you, a Merrill Lynch Financial Advisor can help you create a strategy that is designed to: n Preserve the integrity of your retirement income and spending plans by ensuring out-of-pocket healthcare costs are covered, and contingencies are in place to meet any unplanned expenses; n Ensure that you have choices in the selection of the type of care you might eventually need; and n Protect your assets and provides financial protection to you and your family. Whether you re currently retired or retirement is still several years down the road, now is the time to work with your Financial Advisor to consider preparing and implementing strategies that can help protect your assets from the risks posed by future healthcare expenses. 10

11 Contact your Merrill Lynch Financial Advisor to discuss your healthcare expense planning needs and options, or visit us online at wealthmanagement.ml.com. 11

12 1 Employee Benefit Research Institute, December Fidelity Benefits Consulting, May National Clearinghouse for Long Term Care Information, U.S. Department of Health and Human Services ( 4 Genworth 2012 Cost of Care Survey This material should be regarded as educational information on Medicare and healthcare costs and is not intended to provide specific healthcare advice. If you have questions regarding your particular situation, please contact your healthcare, legal or tax advisor. Merrill Lynch and its affiliates do not monitor or maintain the information available on the external web sites mentioned nor do they represent or guarantee that such web sites are accurate or complete, and they should not be relied upon as such. Long-term care insurance coverage contains benefits, exclusions, limitations, eligibility requirements and specific terms and conditions under which the insurance coverage may be continued in force or discontinued. Not all insurance policies and types of coverage may be available in your state. Life insurance policies contain fees and expenses, including cost of insurance, administrative fees, premium loads, surrender charges and other charges or fees that will impact policy values. Life insurance death benefit proceeds are generally excludable from the beneficiary s gross income for income tax purposes. There are a few exceptions, such as when a life insurance policy has been transferred for valuable consideration. All guarantees and benefits of an insurance policy are backed by the claims-paying ability of the issuing insurance company. They are not backed by Merrill Lynch or its affiliates, nor do Merrill Lynch or its affiliates make any representations or guarantees regarding the claims-paying ability of the issuing insurance company. Merrill Lynch and its Financial Advisors do not provide tax, accounting or legal advice. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties. Please consult your own independent advisor as to any tax, accounting or legal statements made herein Bank of America Corporation. All rights reserved. I ARBA1466 I

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