Funding Healthcare with Annuities

Share via emailShare on FacebookShare on Twitter

Most Americans have enjoyed the privilege of having their healthcare subsidized by employers—usually about 75% of the total premium—for the majority of their working lives. Combine that comfort with the assurance that for the past 50 years, Medicare has provided access to affordable health-related goods and services for all citizens once they turn 65, and what do we have?

A population that has very little knowledge of what healthcare actually costs.

Now let’s add this general disinterest to the very real fact that 10,000 people per day—who will live longer than any previous generation—are signing up for Medicare over the next 20 years (from 50 million to 80 million by 2032), and they will now be fully responsible for all of their healthcare expenses. Concurrently, the ratio of workers paying taxes to support Medicare will plunge from 3.5 to 2.3.

What does all of this create?

A perfect storm of economic disaster for the Baby Boomer generation.

The evidence is simply overwhelming.

  • According to the 2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplemental Medical Insurance Trust Fund, Medicare is expected to jump from $522.8 billion in 2010 to $932 billion in 2020—an unfathomable 78% increase in only 10 years!
  • A recent report from Credit Suisse estimates that healthcare comprises 33% of expenditures for people over 60, dwarfing food and housing (23%).
  • For the third year in a row, according to the most recent “Affluent Insights Survey” conducted by Merrill Lynch, Americans cite rising healthcare costs as their greatest concern in retirement.
  • According to a Sun Life Financial “Unretirement Survey,” 92% of Americans lack a specific retirement plan that factors in healthcare costs.

There is no sugarcoating it. Looking forward, Medicare will eventually be unable to provide the same coverage for seniors that it does now, which will lead to increased premiums, decreased benefits, or both.

So the problem is identified, but another question remains: Is there a solution?

Here’s the answer: the financial services industry is finally starting to listen.  As survey after survey indicates, retiring Americans are embracing the concept that accounting for healthcare expenses must become the foundation of the retirement planning process.  While some firms are beginning to forge ahead in this domain, their estimates for what is necessary to fund healthcare are not backed by medical or actuarial data and often project figures far below true cost.  In order for consumers to have some idea how much money is needed for health-related expenses, a more accurate computation—one that is based on clients’ individual health histories—is necessary.

There is also some hesitation by individual advisors to accept this new philosophy, as the notion of filtering through the vast Medicare bureaucracy to inform clients of healthcare expenses in retirement is most certainly daunting.  The truth is advisors can fully service client needs by simply becoming familiar with basic features of the program and remaining vigilant of legislative changes related to healthcare as they occur.

Very slowly, institutions and advisors are moving toward a singular conclusion: healthcare expenses need to be addressed.  The next step becomes: what product is best suited for this task?

The answer may lie in annuities.

While often criticized for inflexibility and high fees, annuities are nonetheless a safe and practical investment vehicle to fund healthcare throughout retirement.  With the goal of creating a steady distribution of income to address this one expenditure, annuities can, in essence, become pensions for the pension-deprived.  In today’s volatile market, one that is susceptible to frequent triple-digit swings, the stability of annuities provides some measure of insulation for Boomers (some of whom are still reeling from 2008) from bear markets. Combine this piece of mind with the additional tax benefit of being able to roll over lump-sum retirement savings (401k or IRA funds) without penalty, and annuities may develop into an increasingly vital component of a successful Baby Boomer investment strategy.

Dan McGrath is Director of Healthcare Funding Strategies at HVS Financial, and has over 20 years of broad financial and healthcare-research experience. He is considered a leading specialist on Medicare and Medicare-related expenses, including their impact on both the financial services industry and the Baby Boomer generation throughout retirement.

Related Articles