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Planning for the Rising Costs of Health Care


By: Jan Paul Ferrer


Health care costs are rising—especially for retirees, and many will need long-term care. Learn the moves you can make to help prepare yourself.

Longer lifespans and rising health care costs are driving investors to control their fi nancial exposure to uncovered bouts of care—particularly in retirement.

According to the U.S. Centers for Medicare and Medicaid Services, the U.S. spends approximately $3.6 trillion a year on health care, or nearly $11,172 per person. Overall spending rose 4.6% in 2018,1 faster than the pace of infl ation or wage growth. As spending rises, patients are also shouldering a larger share of treatment costs—driving up out-of-pocket expenses. The elderly, who require the most care, often bear the brunt of the costs.

It is important to take steps to minimize your fi nancial exposure to uncovered medical costs. But whereas your incentives for saving for retirement are easy to digest—to be able to aff ord a desired lifestyle after your working years—planning for the less palatable aspects of old age can be more challenging.

Health Care Costs Planning

A report from the U.S. Department of Health and Human Services estimates that 70% of people turning 65 will need some type of long-term care services in their remaining years.2

One year in a private room in a nursing home costs $105,266 today and is projected to reach $190,122 in 20 years.3 Even with a robust portfolio, you may have trouble handling such large costs with savings on hand.

Many adults nearing retirement age are concerned about healthcare costs but unsure how to budget for them. More than half of affl uent, older Americans are unsure or can’t estimate what their annual health care (53%) or long-term care costs (67%) in retirement will be.4

Those fears are warranted. An average retired couple age 65 in 2020 may need approximately $295,000 in after-tax savings to cover health care expenses in retirement. Their actual cost will depend on when they retire, lifespan, and health situation.5

Should they encounter serious medical trouble, the costs will be even higher. Many Americans aren’t even aware of the uninsured costs they may face in these cases. A stroke, for example, may cause paralysis, warranting expensive 24-hour assistance.

Medicare Part A covers nursing facility care for a limited time, but only after a qualifi ed hospitalization. However, Medicare will not pay for nursing homes when custodial care is the only care needed; nor will it pay for care for conditions such as Alzheimer’s disease. Patients suff ering from Alzheimer’s or other cognitive ailments may live for many years, all the while requiring assistance and, as the disease worsens, expensive hands-on assistance.

Protection for Retirement Savings

By the time people reach their 30s, they tend to have a pretty good idea of the lifestyle they want to pursue, including in retirement, says Kristi Rodriguez, the National Sales Manager for insurance provider Nationwide. There are a number of ways to save for retirement with your future health care needs in mind.

Investors in their 30s or early 40s, Rodriguez says, may weight their retirement-funding strategies toward a portfolio of mutual funds or a managed-account solution, to provide upside exposure to the market. Given lower premiums for younger policyholders, long-term care insurance should also be a consideration, she says.

These days, only a handful of insurers off er long-term care insurance, so another option may be life insurance with a long-term care rider, which allows families to tap into the benefi ts they would receive upon the policyholder’s death, while he or she is alive and requires care.

Another option for funding long-term care expenses is to withdraw or borrow money from life insurance policies, or generate income from annuities. Note that either of these options would probably fall short of covering costs if someone needs care for many years.

Paying for Unexpected Health Care

Costs A fi nal consideration is what to do when you’re faced with a large unexpected medical bill today. One answer may be a securities-based loan, which allows qualifi ed clients to use the eligible securities in a brokerage account as collateral for a loan or line of credit, often at a competitive rate. When faced with a large health-care expense, investors often liquidate fi nancial assets to pay for immediate needs. However, this strategy may have unintended costs, such as tax consequences, potential loss of future growth or an imbalance in your portfolio’s asset allocation.

Once approved, a securities- based loan can provide quick access to funds for a variety of needs with the potential to maintain your long-term investment strategy. Your Morgan Stanley Financial Advisor can provide you with additional information and help determine if this is the right strategy for you.

Protect Your Finances and Your Health

As health care costs continue to rise, it’s important to understand the options you have to help protect the assets you’ve spent a lifetime accumulating. Your Morgan Stanley Financial Advisor has access to multiple long-term-care products from a wide variety of respected insurers and can help you choose the one that off ers the optimal combination of cost and benefi ts.

Important Disclosures: Article by Morgan Stanley and provided courtesy of Morgan Stanley Financial Advisor.

Jan Paul C. Ferrer is a Financial Advisor in Chicago, IL at Morgan Stanley Smith Barney LLC (“Morgan Stanley”). He can be reached by email at janpaul.ferrer@ morganstanley.com or by telephone at 312 312-419-3535

This article has been prepared for informational purposes only. The information and data in the article has been obtained from sources outside of Morgan Stanley. Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of the information or data from sources outside of Morgan Stanley. It does not provide individually tailored investment advice and has been prepared without regard to the individual fi nancial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this article may not be appropriate for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affi liates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters.

Jan Paul C. Ferrer.may only transact business, follow-up with individualized responses, or render personalized investment advice for compensation, in states where [he/she] is registered or excluded or exempted from registration, https://advisor.morganstanley. com/janpaul.ferrer

Morgan Stanley Smith Barney LLC is not implying an affi liation, sponsorship, endorsement with/of the third party or that any monitoring is being done by Morgan Stanley Smith Barney LLC (“Morgan Stanley”) of any information contained within the website. Morgan Stanley is not responsible for the information contained on the third party website or the use of or inability to use such site. Nor do we guarantee their accuracy or completeness.

Insurance and annuity products are off ered in conjunction with Morgan Stanley Smith Barney LLC’s licensed insurance agency affi liates.

Since life insurance and long-term-care insurance are medically underwritten, you should not cancel your current policy until your new policy is in force. A change to your current policy may incur charges, fees and costs. A new policy may require a medical exam. Actual premiums may vary from any initial quotation. Surrender charges may be imposed and the period of time for which the surrender charges apply may increase with a new policy. You should consult with your own tax advisors regarding your potential tax liability on surrenders.

Withdrawal and distributions of taxable amounts from annuities are subject to ordinary income tax and, if made prior to age 59 ½, may be subject to an additional 10% federal income tax penalty. Early withdrawals will reduce the death benefi t and cash surrender value.

Life Insurance policy loans and withdrawals will reduce the contracts, cash value and death benefi t and may cause the policy to lapse. If the policy lapses, you may incur tax consequences. In addition, policy loan interest will be charged annually on any outstanding loan balance.

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