Savings levels needed for those with cancer, cardiovascular disease, Type 2 diabetes and other health states vary considerably
Health costs -- and related mortality projections — have counterintuitive effects on retirement planning
GREENWOOD VILLAGE, Colo., Feb. 10, 2016 — If Americans saving for retirement consider their specific health conditions as part of their investing plan, they will have greater clarity on how to meet their financial needs in retirement, according to new research published today by the Empower Institute.
The paper, “An Apple a Day: The Impact of Health Conditions on the Required Savings for Healthcare,” published today, is the first of its kind to apply health conditions and mortality projections to savings requirements.
The paper covers the vital considerations needed to more effectively measure healthcare costs for retirees and lays out the implications to retirement from such common health afflictions as: cancer, cardiovascular disease, Type 2 diabetes, tobacco use and elevated blood pressure and cholesterol.
“This is an effort to bring greater clarity to a largely ignored aspect of retirement planning,” said W. Van Harlow, Ph. D., CFA, director of research for the Empower Institute. “There’s no question that there is a significant population of households who could benefit from incorporating health state into their view of retirement medical costs,” said Harlow.
Harlow pointed out that data from an earlier study, the Lifetime Income Score V, shows that only one of five households is expected to be healthy as they enter retirement.1
The new study shows that for a healthy 65-year-old male retiree cumulative savings of approximately $144,000 would be required to fund retirement healthcare expenses which primarily include Medicare parts B and D, supplemental insurance and out-of-pocket expenses. (For a female, the amount would be $156,000.)
This graph (below) from the latest study shows how much a 65-year-old male — and an assumed investment mix of 60 percent bonds and 40 percent stocks — would likely need to fund healthcare expenses in retirement at a 90% confidence level.
“The study also offers a slew of counterintuitive conclusions to some long-held retirement planning assumptions. For example, conventional wisdom suggests that healthy retirees would enjoy lower overall healthcare expenses throughout retirement. However, a longer lifespan means continued Medicare premium payments,” Harlow said.
The study says that determining the necessary amount of savings requires a detailed analysis of the specific health states of those approaching retirement. A direct correlation between adverse health conditions in general and higher healthcare expenses isn’t a viable approach because not all health conditions have the same impact on one’s savings, says Harlow.
For example, the study shows that high blood pressure is highly prevalent among pre-retiree households. However, high blood pressure is very treatable through medication and dietary changes. As such, it has a negligible effect on life expectancy. The study found that the life expectancy for someone with high blood pressure is only one year less than that of healthy individual.
The same cannot be said for all health conditions. Diabetes, cancer and tobacco use present a much greater variance in the probability of survival and life expectancy numbers are shown to drop more significantly compared to a healthy individual, according to the study.
“Simply providing a generic cost projection is not enough, this approach needs to be tailored to specific health states that are shown to be common among retirees,” said Harlow.
The study explains the Empower Institute’s proprietary formula which combines elements of health-specific mortality risk with investment return uncertainty to help determine the amount of savings required to fund future healthcare expenses. The study indicates that required healthcare savings differ significantly when putting factors like actuarial tables and Medicare expenses into the overall equation.
Advisors and participants can use greater clarity around health conditions to influence savings and investing plans.
“First, it’s crucial that participants fully understand their health condition as they approach retirement,” said Harlow. “Next, a person’s long term health should be a part of the conversation with their financial advisor. More information will make that a more productive conversation.”
Harlow noted that while the study highlights the need to make healthcare a core component of retirement planning, it also offers participants and advisors an opportunity to cut through some of the murkiness in decision-making.
“With more information and greater clarity, participants should have greater confidence in the decisions they make about investing, financial planning and ultimately retiring,” said Harlow.
About Empower Institute
Utilizing resources from within Empower Retirement and the academic and policymaking communities, Empower Institute critically examines investment theories, retirement strategies and assumptions, and suggests changes that can achieve better outcomes for companies, institutions, retirement plan sponsors, investment advisors and individual investors. The Institute helps to advance the debate on these issues by publicly sharing its studies and by holding seminars and other educational events, including many intended to benefit the financial advisor community. Research from Empower Institute is available at www.empower-institute.org.
Headquartered in metro Denver, Empower Retirement administers $440 billion in assets for 7.5 million participants. It is the nation’s second-largest retirement plan record keeper by total participants (PLANSPONSOR, June 2015). Empower serves all segments of the employer-sponsored retirement plan market: government 457 plans, small, midsize, and large corporate 401(k) clients, non-profit 403(b) entities and private-label recordkeeping clients. For more information, please visit www.empower-retirement.com.
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