Healthcare Costs in Retirement Guide

Transcription

1 Healthcare Costs in Retirement Guide RETIREMENT Merrill Lynch developed this guide to help you plan for healthcare costs in retirement. Cost estimation is an important component of planning. Just as important, this guide is also designed to help you identify income sources to cover costs and adjust your overall expectation of retirement spending. Inside you will find: n A step-by-step process on making adjustments to average costs based on your situation n Projected healthcare cost inflation rates n Four possible ways to deal with uncertainty inherent in estimating costs n A chart with pros and cons of various long-term care solutions

2 Table of Contents I. The Merrill Lynch Point of View on Healthcare Cost Planning II. View Annual Expenses as Part of Your Overall Spending Plan Identifying income streams to cover costs and inflation as part of your annual spending plan may make planning easier for you. III. Use Averages as a Starting Point When Estimating Costs Steps 1 4 in the Estimating Costs section take into account your age, health status, employer-provided benefits, income and healthcare cost inflation to refine your estimate. IV. Incorporate Healthcare Costs into Your Overall Plan You may choose to reduce other expenses or identify additional income sources to help offset inflation in later years. You also want to ensure you aren t doublecounting some healthcare costs. V. Understand Variability and Risks Costs can vary based on your insurance plan type and where you live. Your costs may also change due to unexpected health issues or legislative changes. VI. Plan for Long-Term Care It is important to have a plan for possible long-term care. There are many ways to address the issue, and a good plan may incorporate a combination of solutions. VII. Action Steps Review a list of steps you can take when planning for healthcare costs in retirement. 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 Bank of America Corporation. All rights reserved.

3 I. Merrill Lynch Point of View on Healthcare Cost Planning The Importance of Planning for Healthcare Costs Paying for healthcare costs in retirement may be one of the most daunting retirement planning challenges you will face. These costs may be a significant part of your total retirement expenses and are not optional. Planning for them is complex because: n As these costs continue to rise dramatically, it becomes hard to predict the future. n You may have uncertainty about your future health status and the future health status of your parents. n Medicare and supplemental insurance differ fundamentally from employer-subsidized premiums and coverage. n Ongoing changes to the national healthcare system add uncertainty and risk. I. The Merrill Lynch Point of View on Healthcare Cost Planning Merrill Lynch research indicates that most people are concerned about healthcare costs. This apprehension peaks in pre-retirement years, with 76 percent of those aged citing high levels of concern. 1 Despite the importance of this topic, the information available may be of limited use. The press and academic studies cite required levels of saving that can seem overwhelming and these often exclude long-term care costs. In addition, many retirees will find that their actual costs are significantly different from estimated averages. To address this issue, Merrill Lynch has developed the following roadmap to help you plan for annual expenses: Simplify your planning by identifying income streams to cover annual costs. Estimate costs and use a relatively high inflation rate to account for cost increases over time. Understand that costs may vary based on your insurance plan type, unexpected health issues, possible need for long-term care and legislative changes. In this guide, we ll discuss this roadmap and long-term care planning in more detail and provide you with suggested action steps, as outlined in the table of contents. 1

4 II. View Annual Expenses as Part of Your Overall Spending Plan II. View Annual Expenses as Part of Your Overall Spending Plan Identifying Income Sources to Cover Insurance Premiums and Out-of-Pocket Expenses The Employee Benefits Research Institute estimates that a 65 year-old couple with median drug expenses needs $158,000 to have a 50% chance of being able to cover healthcare expenses in retirement, not including long-term care costs; a couple with $271,000 in savings has a 90% chance. 2 These numbers seem overwhelming, but may be more manageable than they appear because you won t have to pay insurance premiums and out-of-pocket healthcare expenses as a lump-sum. In addition, if you created a rough estimate for a retirement spending plan based on your current spending levels, you have likely incorporated some healthcare spending in your plan. POTENTIAL SOURCES OF INCOME TO COVER ANNUAL HEALTHCARE COSTS Income Streams Assets Work in Retirement/ Second Act Income Investment Income Lifelong Guaranteed Income Savings/ Principal n Employer Subsidized Insurance n Income from Work (full-time, part-time or seasonal) n Dividends n Interest n Rental Property Income n Social Security n Pensions n Guaranteed Annuity Payments 3 n Tax-Free Withdrawals from Health Savings Accounts (HSAs) 4 n Sale of Investments 5 n Withdrawals from Savings, Annuities and Insurance 5 With your Financial Advisor, you may look at the table above and see how it might apply to you. In particular, you may consider income from work in retirement. You may be able to think of retirement as a new phase of life, or a second act, which may provide an opportunity to work in an area that is meaningful, and/or a chance to obtain part-time or seasonal work. In some cases, health benefits may be provided by your employer. In any case, a continuing income stream for a number of years will help your nest egg last longer. 2

5 III. Use Averages as a Starting Point When Estimating Costs III. Use Averages as a Starting Point When Estimating Costs This section discusses four steps that will help you estimate insurance premiums and annual out-of-pocket expenses. While articles about healthcare costs often focus on the average cost, your actual spending may be much higher or lower, based on factors such as age, health status, income level and coverage from a former employer. In a 2010 Bank of America Merrill Lynch survey, retired individuals with investable assets of at least $100,000 who could estimate their expenses reported annual costs ranging from under $3,000 to over $10,000. The graph on the bottom left illustrates the wide variation in retiree healthcare costs experienced by retirees. Step 1: Adjust Averages for Health Status and Age Given the variation in costs experienced by retirees, it may help to start with annual average costs adjusted for health status and age, and then make adjustments for additional variables such as employer-provided retiree benefits and income. The chart on the bottom right shows costs for today s Medicare beneficiaries. 36% 35% 29% 16% 13% Under $3,000 $3,000 $6,000 $6,000 $10,000 More than $10,000 RETIREES AGE ANNUAL HEALTHCARE EXPENSES, JULY 2010 AVERAGE ANNUAL HEALTHCARE COSTS BY AGE FOR INDIVIDUALS ON MEDICARE % 29% 16% $6,000 $5,500 $5,000 $4,500 $4,660 $4,760 $4,860 $4,450 $5,200 $5,220 $5,100 $5,535 $5,635 35% 13% $4,000 $3,500 Under $3,000 $3,000 $6,000 $6,000 $10,000 More than $10,000 $3,000 Age 65 Age 70 Age 75 Excellent Health Moderate Health Poor Health Bank of America Merrill Lynch Healthcare Survey, July 2010 $6,000 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 $10,000 3 $5,500 $5,535 $5,635 $9,000 $8

6 III. Use Averages as a Starting Point When Estimating Costs Retiring Before You or Covered Family Members are Age 65 If you plan to retire before you or a covered family member is age 65, and you won t have a retiree medical plan from your employer, your costs are likely to be significantly higher until you become eligible for Medicare. While the chart below gives a rough idea of costs for a private plan and out-of-pocket expenses, your actual costs may be significantly higher or lower depending on: n your pre-existing conditions n laws that govern private insurance policies in your state n the type of insurance coverage you purchase AVERAGE ANNUAL HEALTHCARE COSTS BY AGE, NO EMPLOYER SUBSIDY, 2011 $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $6,775 $7,600 $8,105 $7,185 $8,220 $8,735 $8,105 $8,760 Age 54 Age 59 Age 64 $9,425 Excellent Health Moderate Health Poor Health 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 Therefore, if you are thinking about retiring without employer coverage before you are 65 years old, it may be a good idea to get a quote for health insurance beforehand. For more information on obtaining insurance coverage before you turn 65, ask your Financial Advisor for the Merrill Lynch Pre-Medicare Health Insurance Guide. To complete Step 1: Note the amounts on the charts on the previous page that are closest to your current age and health status. If you plan to retire before age 65, you may use both charts or use an insurance quote if you have one. Step 2: Adjust for Employer-Provided Retiree Coverage (if Applicable) Retiree benefit coverage varies by employer type and firm size. In 2010, 87 percent of state and local governments offered retiree health benefits. In the private sector, larger firms were most likely to offer retiree health benefits. While very few small firms offered retiree health benefits to active employees, 48 percent of firms with 5,000 or more workers did so. 7 On average, companies that offered retiree benefits contributed about $1,800 towards medical insurance and healthcare costs for former employees age 65 and older and $3,600 for former employees prior to age 65 in If you have retiree benefits that include family coverage, your employer may offer a larger subsidy. 8 Since the level of coverage varies widely, check with your employer s benefit administrator for specifics. Also ask whether the availability and type of benefits changes at age 65. Benefits for those age 65 and older may or may not include: n a health savings reimbursement account for retirees n a subsidized plan supplemental to traditional Medicare that may have a dollar cap on benefits Definition of Out-of-Pocket Expenses: It is important to note that traditional Medicare and Medigap plans do not generally cover hearing aids, routine dental care and most vision care. 6 Out-of-pocket costs in retirement include these and other healthcare costs not covered by insurance, such as deductibles, co-insurance and co-payments. n Deductibles: the amount you pay before your insurance coverage starts n Co-insurance: percentage of care you pay for after you meet your deductible n Co-payments: a flat fee for services or drugs that is usually paid in addition to co-insurance 4

7 III. Use Averages as a Starting Point When Estimating Costs n access to a group Medicare Advantage plan as an alternative to traditional Medicare that may be subsidized by the employer n prescription drug coverage Employers may eliminate, cut back or change benefits in the future. According to a 2011 employer survey by Towers Watson/National Business Group, one of the most common changes that employers are planning for 2012 is shifting from employer plan sponsorship and subsidies to health savings accounts. If your employer contributes to a retiree health savings account instead of offering an employer-sponsored plan or subsidy, that will still allow you to offset some medical expenses in a way that is tax advantaged. You may also be able to save for future healthcare expenses if you don t spend down the account each year. When planning, recognize that dollar caps on benefits, a shift to health savings accounts and other plan changes are likely to limit your employer s liability and future cost sharing. This may result in you paying a higher percentage of your total healthcare costs as you age or if you experience an unexpected health condition. To account for this, you may want to lower the estimated amount of your employer s subsidy. It is also important to examine your insurance options and policy limitations. See the chart below to get an idea of the changes employers are contemplating. To complete step 2: Note your estimate of how much your employer may reduce your healthcare costs at the start of your retirement. If you know that your employer provides benefits for retirees, you may choose to make an estimate of about $1,800 per year for ages 65 or older and $3,600 for years prior to age 65, or you may choose a lesser amount if you are unsure. Given the wide variation in benefits, information from your employer s benefit administrator will allow for a more accurate estimate. Step 3: Adjust For Income Level if You Expect to Have Relativity High Income in Retirement Currently, less than 5 percent of individuals enrolled in Medicare pay incremental premiums due to their income level, but this is projected to increase to 14 percent of those enrolled in Medicare by This is because the income thresholds are not scheduled to be adjusted for inflation until Medicare Part B (medical insurance) and Medicare Part D (prescription drug coverage) premiums vary by income level. If you have Modified Adjusted Gross Income (MAGI) above $85,000 ($170,000 for married couples filing jointly), your premiums will be higher than for other Medicare beneficiaries. Depending on your income, this may result in an increase in Medicare premiums ranging from approximately $700 per year to nearly $3,900 per year in COMPANIES THAT OFFER RETIREE HEALTH BENEFITS: PLANNED CHANGES IN 2012 Cease employer plan sponsorship 26% Convert health subsidy to health savings account 25% Start facilitating access to plans 23% Eliminate employer-managed prescription drug coverage 23% Make changes to plan subsidy 20% Offer retiree medical savings account 14% Add a dollar cap on benefits 8% Shaping Healthcare Strategy in a Post-Reform Environment 2011, Towers Watson/National Business Group on Health. The survey was completed by 588 employers with at least 1,000 employees between November 2010 and January

8 Make changes to plan subsidy 20% III. Use Averages as a Starting Point When Estimating Costs Offer retiree medical savings account 14% Add a dollar cap on benefits To complete Step 3: If you expect your income to result in increased premiums, estimate the increased cost using the chart below. ANNUALIZED INCREMENTAL PART B AND D PREMIUMS BY INCOME LEVEL, 2011 $697 Single $85,000 $106,999 or Married $170,000 $213,999 $1,757 Single $107,000 $159,999 or Married $214,000 $319,999 $2,815 Single $160,000 $213,999 or Married $320,000 $427,999 Single $214,000+ or Married $428,000+ $3,874 8% Step 4: Adjust Your Estimate to Reflect Projected Cost Increases Each Year Healthcare costs are likely to rise more quickly than overall inflation. Two factors contribute to this: a possible decline in health at older ages and medical cost inflation. Most people experience declining health as they get older. In 2011, average healthcare spending for individuals of moderate health who are on Medicare is projected to be $4,660 for 65-year-olds and $5,535 for those age Medical costs have been increasing faster than overall inflation. Since 1985, the overall consumer price index (CPI) averaged 2.7 percent per year, while medical inflation averaged 4.5 percent. 12 Much of the increase in healthcare costs is due to the widespread adoption of new medical technologies in the U.S. healthcare system. 13 Combines Part B and D incremental amounts. Social Security Administration, Medicare Premiums: Rules for Higher Income Beneficiaries,

9 III. Use Averages as a Starting Point When Estimating Costs 65 YEAR-OLD MEDICARE BENEFICIARY PROJECTED HEALTHCARE EXPENSES $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $ $30,000 $25,000 $20,000 $15, $10, $5,000 Assumes moderate health. Data provided by HealthView using historical insurance claim $0 data and actuarial projections, June Estimating $20,000 Inflation and Future Costs Projected costs at older ages are very high compared 100% 54 YEAR-OLD, NO EMPLOYER SUBSIDY, 90% PROJECTED HEALTHCARE EXPENSES to costs today, so having available income sources and 80% $15,000 funds for later years is important. The projections below 70% are based on historical data and actuarial projections. $20,000 60% $10,000 50% Although there is some year-to-year variation by health 40% status and age, taking into account both aging and $15,000 30% medical $5,000 cost inflation, average healthcare expenses 20% are projected to increase: $10,000 10% n 7% annually $0 for Medicare beneficaries age 65 0% Age n 9% annually for individuals age 54 without employer subsidies pre-medicare 14 $5,000 Women Men The chart above illustrates medical cost inflation for a 65-year-old. It includes a projection of declining health at older ages. $ The chart to the right shows projected costs for a 54 year-old with no employer subsidy for medical insurance to age Assumes moderate health. Data provided by HealthView using historical insurance claim data and actuarial projections, June To complete Step 4: Adjust your estimate for inflation each year. You may choose to use projected rates of 9% pre-65 and 7% per year post 65. 7

10 IV. Incorporate Healthcare Costs into Your Overall Plan IV. Incorporate Healthcare Costs into Your Overall Plan bills to estimate out-of-pocket costs. Make any necessary adjustments to your overall spending plan to ensure you are not double-counting some of your healthcare costs. ADJUSTING A SPENDING PLAN: A CASE STUDY Jim and Sally developed a rough retirement spending plan based on their current spending patterns. They are making their plan more accurate by including an estimate of annual healthcare expenses and using a higher rate of inflation for these costs. Today they both have employer-subsidized insurance. Once you have identified sources of income and estimated your insurance premiums and out-of-pocket expenses, you may think about how to address these costs as part of your overall spending plan for retirement. Funding Healthcare Costs in Later Years If you plan to decrease discretionary spending when you are older, the resulting savings can help fund increased healthcare expenses in later years. Since not everyone plans to travel and have a relatively high entertainment budget early in retirement, this may or may not apply to your individual situation. If you don t plan to decrease other spending later in life, identify income sources you may tap to help offset significantly higher costs that are likely in later years. Your vision of the future will help you refine your overall plan. n Their share of the premium cost is about $116 a month each or $2,800 per year total ($116 x 2 people x 12 months). n Since they are both healthy, they estimate they pay about $200 dollars a year in out-of-pocket costs in a typical year. n Therefore, they currently pay about $3,000 in healthcare expenses per year. Jim and Sally have already factored about $3,000 a year for healthcare costs in their spending plan. If they are going to add an estimate of retiree healthcare expenses as its own budget item, they will need to subtract their current healthcare spending cost of $3,000 from their general expenses. This will allow them to avoid double-counting some costs. Hypothetical example for illustrative purposes only. Avoid Double-Counting Some Healthcare Expenses If you created a rough estimate for a retirement spending plan based on your current spending levels, you may have already incorporated some healthcare spending into your plan. To account for this, you will need to estimate your current healthcare costs. To do so, examine your paycheck stub or insurance bill to see how much is going towards premiums, and review your bank statements and credit card 8

11 V. Understand Variability and Risks V. Understand Variability and Risks Some of the factors that influence costs are difficult to pin down prior to retirement. In addition, estimates can be inaccurate if there is a change in circumstances. To address this, you will need to build some flexibility into your plan. This section will alert you to some of the factors that may present risks. Cost Variation by Insurance Plan Type and Geographic Region There are two sources of variability in costs that are difficult to estimate: plan type and geography. Since Medicare Part D (prescription drug coverage), Medicare Advantage (an alternative to traditional Medicare) and Medigap (supplemental coverage) are offered through private plans, premiums can vary widely by region and by type of coverage. If you are near retirement, near age 65 or older, and are willing to spend some time and effort refining your cost estimate, you may want to use the Medicare PlanFinder on Medicare.gov. Otherwise, keep in mind that you may need to make adjustments to your plan in the future. For more information on Medicare, ask your Financial Advisor for a copy of Merrill Lynch s brochure Healthcare Planning in Retirement: Understanding Your Medicare Options. Medicare Funding and Political Risk An aging population is likely to contribute to Medicare solvency issues. In 2010, there were 3.5 workers per Medicare beneficiary; by 2030 there are projected to be only 2.3 workers for every Medicare beneficiary. This is important because workers pay payroll taxes and income taxes that support the Medicare system. 16 There is a possibility that solvency issues may spur legislative changes. It is difficult to project how this might affect your costs in the future, especially since there is a possibility that changes for those near retirement age may be not as pronounced as changes for younger people. Recommendation: Build flexibility into your plan. Given the inherent uncertainty of cost estimates, you may want to think about possible discretionary spending reductions in case healthcare costs are more than you expected. The Importance of Planning for Variation in Costs from Year to Year Because even the healthiest people are subject to unexpected health issues, your healthcare costs are likely to vary from year to year. It is critical to take these types of events into account. You can do this by establishing an emergency reserve fund, setting up a line of credit that you will be able to pay back over time using your income sources, obtaining adequate insurance and/or determining how you may adjust your overall spending plan. Establish An Emergency Reserve Fund This may be incorporated into an overall fund that will help you handle all types of unexpected events. Consider Establishing A Line Of Credit If you will have income sources to pay back a loan over time, this may be an option for you. Evaluate Insurance Options Get adequate coverage when healthy and when first eligible to avoid penalties and pre-existing conditions issues. Planning for Unexpected Health Events Plan To Make Adjustments To Your Spending Plan You may be able to cut back on discretionary spending. 9

12 VI. Plan for Long-Term Care VI. Plan for Long-Term Care What is long-term care? Long-term care is needed for assistance with 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. The Importance of Having a Plan ESTIMATED CUMULATIVE PERCENT CHANCE OF USING CARE BY AGE 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Age Women Men Although not everyone requires long-term care, it is very likely that you will need care if you live to an advanced age. In addition, health conditions such as cardiovascular disease and cancer increase the likelihood of needing care at younger ages. 17 Most importantly, in the event care is needed, having a long-term care plan may help you feel more secure, manage your financial situation, obtain quality care for you or your loved one and relieve stress on family care-givers. Likelihood of Needing Care The chart to the left illustrates the chances that men and women will need long-term care (home care, assisted living or nursing care) at various ages past 65. n For a 65-year-old, the chance of needing care by age 75 is about 14% for men and 15% for women about one in seven. n This rises dramatically to 46% for men and 52% for women by age 85. n Men who survive to age 90 have a 70% chance of using care at some point, and women have a 77% chance. When looking at these statistics, it is important think about how long you may live. A 65-year-old woman in moderate health has a life expectancy of 89, and a 65-year-old man in moderate health has a life expectancy of 86. Includes nursing care, home care and assisted living use in any year from age 65. Assumes Survival. Derived from actuarial data provided by HealthView, June

13 VI. Plan for Long-Term Care Types of Care As seen in the chart below, the type of care needed varies by age. Since the type of care used by age is very similar for men and women, only the chart for women is shown. n Home care is most common for women age 75 and under, although 8% of those that need care at age 75 use assisted living and one quarter use nursing care. n At ages 85 or older, nursing home care becomes much more prevalant. 19 IF CARE IS NEEDED: TYPE OF CARE BY AGE FOR WOMEN FAMILY CARE-GIVING Whether they plan to or not, many people rely on family. The National Alliance for Care-giving estimates that 19 percent of the adult population provided care to someone age 50 or older in the last year. 18 The amount of care and stress it may place on the caregiver varies widely, but most had to make adjustments at work. n Nearly half provided 1 8 hours of care per week, 35% provided 9 40 hours of care per week and 11% provided more than 40 hours of care per week Age 75 Age 85 67% 8% 25% 45% 14% 41% n 29% provided care for more than five years n 74% were employed while giving care (68% had to make a workplace accommodation such as coming in late, leaving early or taking time off) n 41% had help from a paid caregiver Age 90 27% 18% 55% Home Care Assisted Living Nursing Care n One-third found the emotional stress of care-giving was high Data provided by HealthView using historical insurance claim data and actuarial projections, June Note: Type of Care Utilized by Men by Age is Very Similar (Within 2%) How Long Might Care Be Needed? The length of care needed is difficult to predict. In general, women tend to use paid care longer than men. One possible reason is women have longer life expectancies, and are less likely to have a spouse to care for them at older ages. For those who have Alzheimer s or Parkinson s, the length of care is likely to be longer than average. 20 One in eight people age 65 has Alzheimer s, as do half of people age 85 or older. Most people survive an average of four to eight years with the disease. 21 Shorter or longer periods of care than the average are feasible. 10 percent of people who move to a nursing home will stay there five years or more. There also may be a progression of care from home care to assisted living to nursing care. 22 AVERAGE LENGTH OF CARE BY TYPE OF CARE $180, $160,000 $140, $120,000 $100,000 $80,000 $60,000 Nursing Care $40,000Assisted Living Home Care 2.0 $20,000 Women Men $0 National Manhattan, Topeka, Charleston, Average NY KS SC Data provided by HealthView using historical insurance claim data and actuarial projections, June Home Care Assisted Living Nursin

14 Home Care Assisted Living Nursing Care VI. Plan for Long-Term Care Cost of Care The paid cost of care varies widely by care type, geography and individual facility. National average costs and costs for a few selected locations are listed in the chart to the right. 23 If you are planning for long-term care, you will need to account for inflation. On a national level over the past six years, nursing care and assisted living costs have increased at an annual rate of about 4.5 percent and 6 percent respectively, while skilled home care costs grew at a 1.4 percent rate. 24 Assuming a 5.5 percent inflation rate for all types of care, in 2031 the national average annual costs would increase to about $120,000 for home care, $114,000 for assisted living and $227,000 for nursing care. Developing Your Plan Taking action to stay healthy for as long as possible may be part of your plan. This is likely to lower annual costs and improve your quality of your life. In addition to paying attention to your health, your plan may include several of the options shown below LONG-TERM CARE COSTS FOR ONE YEAR OF CARE $180,000 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 National Average Manhattan, NY Topeka, KS Home Care Assisted Living Charleston, SC Phoenix, AZ Nursing Care Genworth 2011 Cost of Care Survey Data 4/27/2011. Provided by HealthView, June 2011 Potential Solution Pros Cons Considerations Family and friends provide care n No funding required n Familiar with caregivers n May cause stress and hardship for caregivers in some situations n Family may not live nearby n Even if they provide some care, your family may need paid help in some situations Self-funding using investments and savings n No qualification n No insurance costs n Only pay for care received n Requires significant resources n May affect plans to leave assets to heirs, including a surviving spouse n May be combined with other options: you may choose to partially self-fund Home equity n You may already have equity in your home n No insurance costs n Only pay for care received n Requires income source to repay home equity loan/line n Real estate market may decline when you need care n Plan ahead to put yourself in a position to use home equity when needed Traditional long-term care insurance 25 n Generally provides the most coverage per premium dollar if care is needed n Ability to leverage premium dollars if care is needed n Health qualifications n Premiums require current funding n May not use benefits or fully utilize benefits n Must have adequate funds to pay premiums and premium increases Life insurance policy with long-term care (LTC) policy rider 25 n Policy may allow recovery of premium death benefit to heirs if LTC benefit is not used n Ability to leverage premium dollars if care is needed n Health qualifications (although generally less than for traditional long-term care) n Premiums require current funding n Compare benefits with possible need for care Continuing care community (may supply housing, healthcare and social services) n In some contracts, a place to live and care may be provided if funds are insufficient n Relatively high purchase price and monthly payment required n Must be in fairly good health to join n Financial stability and management of the community are very important 12

15 VI. Plan for Long-Term Care/VII. Action Steps Government Programs In addition to potential solutions outlined on the prior page, you may be wondering about government programs. Here s a brief summary: n Medicare: Medicare generally doesn t pay for longterm care expenses such as custodial care to help with activities of daily living. A limited benefit may be provided for skilled nursing care if medically necessary. n Medicaid: Asset and income levels to qualify vary by state, but are generally very low. There is also a look back period at assets spent in the five years before qualifying, to discourage transfer of assets to family members. 26 VII: Action Steps As you plan, you may find these action steps helpful. Action Steps for Everyone: n Consider a second act. Paid work in retirement, whether from cycling in and out of work, working at a more fulfilling position, or working in a less stressful occupation will generate income that may offset healthcare expenses. Some jobs also offer health insurance benefits. n Take care of your health. People in good health tend to have lower annual expenses for healthcare. Good health is also likely to enhance your ability to work in retirement and generate second act income and, more generally, to do the things you want and to lead an active lifestyle. Action Steps for Pre-Retirees and Retirees: n Use Steps 1 4 in the Cost Estimation section as a starting point to estimate healthcare costs in retirement. Start with an average, based on your age and health status, then adjust for employer subsidies and income level. If you created a rough budget that includes healthcare expenses, ensure you aren t double-counting expenses. n Realize that your annual healthcare expenses are likely to increase at a rate that is significantly higher than overall inflation. Factor in higher expenses as you get older with an estimated inflation rate for healthcare costs. n CLASS ACT: The CLASS ACT, or Community Living Assistance Services and Supports program, is a national voluntary insurance program to be financed by premium contributions of working individuals. To receive benefits, premiums must be paid for at least five years. The program will pay benefits of at least $50 per day, but is not designed to pay for all long-term care costs. Details of this program are scheduled to be set by October 2012, when enrollment is expected to begin. 27 Since the CLASS ACT is not yet in place, its implementation remains uncertain. n Plan for variation in expenses from year to year that may result from an unexpected illness or injury. An emergency savings reserve, adequate insurance, a line of credit and a plan to adjust spending are some ways to handle unexpected events. n Develop a plan for possible long-term care needs. Review your options and consider that you may be able to use more than one solution to pay for longterm care costs. n Talk to your Merrill Lynch Financial Advisor about incorporation of healthcare costs into your retirement spending plan. Action Steps for Younger Investors: n Save for your overall retirement goals. Consider increasing contributions to tax-advantaged options, such as a 401(k) or IRA. Given uncertainty about medical expenses far into the future, you may want to focus on saving diligently for your overall retirement goals. Time is on your side: compound interest and investment returns can help you build a nest egg. n If you have access to a high-deductible healthcare plan, evaluate funding a Health Savings Account (HSA). HSAs allow for tax-advantaged savings and withdrawals for healthcare expenses. n Consider disability insurance. If you are unable to work, disability insurance will allow you to have a continuing income stream to replace part of your income for a period of time. This will make it easier for you to pay any medical bills, avoid financial problems and stay on track for all your financial and life goals. 13

16 This material should be regarded as educational information on healthcare costs and is not intended to provide specific healthcare advice. If you have questions regarding your particular situation, please contact your legal or tax advisor. 1 Merrill Lynch Affluent Insights Survey, July EBRI Issue Brief No. 351, Funding Savings Needed for Healthcare Expenses for Persons Eligible for Medicare, December Guarantees are subject to the claims-paying ability of the issuing insurance company. 4 Funds withdrawn for non-qualified purposes prior to age 65 are subject to ordinary federal income tax, plus a 20% additional tax. 5 Before initiating a sale or withdrawal, be sure to consider any taxes, penalties and expenses associated with the sale of an investment or withdrawal. 6 Centers for Medicare and Medicaid Services, Medicare and You 2011; Centers for Medicare and Medicaid Services, Choosing a Medigap Policy: A Guide for People with Medicare Kaiser Family Foundation, Medicare Chart Book, Fourth Edition, 2010 and Kaiser/HRET Survey of Employer Sponsored Health Benefits, Derived from 2010 Healthcare Cost Survey, 21st Annual U.S. Results Report, Towers Watson 9 Kaiser Family Foundation Medicare Issue Brief: Income-Relating Medicare Part B and Part D Premiums, December For those who are married filing separately, incremental Part B and D premium costs in 2011 are: $2,815 for those with MAGI of $85,000 - $129,000 and $3,874 for those with MAGI greater than $129,000. Details are in: Social Security Administration, Medicare Premiums: Rules for Higher Income Beneficiaries, Extrapolated from actuarial data supplied by Healthview to Bank of America Merrill Lynch, June US Bureau of Labor Statistics, CPI Detailed Report for March 2011, Table 2 13 Congressional Budget Office, Technological Change and the Growth of Healthcare Spending, January Assumes Medigap Part C. Derived from actuarial data supplied by Healthview to Bank of America Merrill Lynch, June Actuarial data supplied by Healthview to Bank of America Merrill Lynch, June Kaiser Family Foundation, Medicare Spending and Financing: A Primer, Actuarial data supplied by Healthview to Bank of America Merrill Lynch, June Based on a survey of 1,639 adults by the National Association for Caregiving in collaboration with the AARP, Caregivers were asked if they provided unpaid care to someone age 50 or older in the past twelve months. 19 Actuarial data supplied by Healthview to Bank of America Merrill Lynch, June Actuarial data supplied by Healthview to Bank of America Merrill Lynch, June Alzheimer s Association Fact Sheet, March University of California, Planning and Paying for Long-Term Care, Publication 8283, February Genworth 2011 Cost of Care Survey, 4/27/2011. Home care assumes skilled nursing care, 44 hours per week; assisted living assumes 1 bedroom; nursing care assumes private room. Costs by specific area are often available on long-term care insurance web sites. 24 Genworth 2011 Cost of Care Survey, 4/27/ Long-term care insurance coverage contains benefits, exclusions, limitations, eligibility requirements and specific terms and conditions under which the coverage may be continued in force or discontinued. Not all insurance policies and types of coverage may be available in your state. 26 Medicare.gov website, June Kaiser Family Foundation, Focus on Health Reform 2010, Health Reform and the CLASS ACT, April 2010 ARP3D5U PM-0811