In a recent article, Rethinking65 discussed how two-thirds of Americans are terrified about medical costs in retirement. The article is based on findings from a Nationwide survey that shows Americans are increasingly worried about paying for medical costs when they are retired. According to the new Nationwide Retirement Institute research, even more Americans (72%) say a top fear is that their healthcare costs will go out of control during their retirement.
There’s an interesting twist to this survey: A quarter of respondents expect artificial intelligence (AI) advancements in healthcare to add more than a decade to their lifespan. Yes, you read this right. One in four respondents envision AI to be so powerful in healthcare that it will increase our lifespans by, on average, over ten years.
This leads to a “good news” and “bad news” conundrum.
Most of us would think it good news to live another decade in retirement. The challenge, however, is who’s going to pay for the health costs associated with this significant increase in longevity? This is a conversation advisors need to have with their clients.
How AI may lengthen lives
The ways AI may affect healthcare in retirement is an unknown for all of us. In fact, three quarters of the respondents in the Nationwide survey don’t feel AI will have any effect on lifespans. But the one quarter who do may be on to something. Numerous ideas have been floated regarding how AI will lengthen our lives, including:
- Better and earlier diagnosis of diseases.
- Personalized medicines.
- Improved monitoring and dispensing of medications.
- Increased access to remote healthcare.
Beyond increasing our lifespan, it has been posited that AI biomarkers will be developed to actually predict life expectancy. This suggests Americans will not only live longer lives on average, but also know where they fit personally in the life expectancy curve.
Fitting AI into the retirement-planning discussion
While it may not be the advisor’s job to debate whether increased lifespans from AI are science fiction or science fact, it is important to assess what the client anticipates in terms of longevity. If clients feel they may potentially live another 10 years because of AI (or just because of medical advancements in general), the advisor should discuss with them how to tweak – or even overhaul — their retirement plans. More years in retirement means additional income needs must be taken into account.
Planning for a longer lifespan involves more than just saving additional dollars. Here are some possible ways an advisor can help expose and address this longevity risk.
1. Number crunching
The well-known 4% rule is based on living 30 years in retirement. It posits that, with appropriate portfolio planning, you can safely withdraw from your retirement capital a cost-of-living-adjusted 4% each year for 30 years. So if you retire at 65, an inflation-adjusted 4% annual drawdown should leave enough money to make it to age 95. While the validity of this guideline has recently come into question, it becomes all the more dubious if the age 65 retiree is expecting to live beyond age 95. The advisor and client should examine scenarios where lifespans are lengthened beyond 30 years to assess how severe the income shortfall may be.
2. New retirement income strategies
If the possibility of a longer period in retirement is anticipated, having guaranteed lifetime income becomes even more important. The advisor may want to discuss income strategies such as delaying filing for Social Security, using annuities, and employing other tools that can provide additional income that the client can’t outlive.
3. New pre-retirement planning
If a client expects the longevity needle to move to the right, they should also reconsider their expected retirement date. Obviously, funding a 40-year retirement is significantly more expensive than a 30-year retirement. Maybe the client should instead look at a later retirement date. Presidents have served in their 70s and 80s; there’s nothing magical about age 65.
Implicit in this kind of pre-retirement planning is that decisions about filing for Social Security and Medicare can be separate from deciding one’s retirement date. Medicare may begin at age 65, but that does not require the participant to retire at age 65. And even though filing for Social Security should begin by age 70, that doesn’t mean working past that age is somehow a waste. In addition to a continued salary, a worker can increase Social Security benefits by working past age 70; there is no age at which Social Security income is frozen.
New approaches to healthcare
Whether because of AI specifically or medical advancements in general, the landscape for healthcare is rapidly changing. As advisors work with their clients on planning for the future, a fresh look at retirement healthcare is needed. There are three unique risks that should be addressed in thinking about this planning issue:
- How does a retiree pay for the ongoing costs of Medicare (for example, Parts B, D and Medigap) and for ongoing costs that are not covered by Medicare (over-the-counter drugs, eye glasses, dental, etc.)?
- How does a retiree pay for the additional — and significant — costs associated with a long-term-care event? According to multiple sources, nearly 70% of seniors over 65 will need long-term care at some point. And the likelihood of incurring a long-term-care event increases with age: If you live longer, your LTC risk increases.
- Especially if AI lengthens lifespans, how does a retiree pay for the additional costs of healthcare caused by living more years than anticipated?
When healthcare affordability and security is a key concern in retirement planning, two planning strategies standout: 1) prefunding healthcare risks and 2) guaranteed lifetime income sources to pay for healthcare late in life.
Prefunding health risks
Prefunding healthcare risks offers the advantage of spreading out the costs of funding healthcare in retirement. A health savings account is often an excellent prefunding strategy.
HSAs enable people to save while they’re still working for the healthcare costs they’ll incur not just now but also in retirement. Eligible employees can open HSAs on a pre-tax basis, effectively reducing taxable income. Individuals can use their HSA funds to pay qualified medical expenses while they’re working and throughout their retirement years. An HSA accountholder still working at age 65 should consider delaying signing up for Medicare Part A; this allows the worker to continue qualifying to make HSA contributions.
Long-term-care insurance (LCTI) is another prefunding strategy to consider. While the insurance industry had a rough start with LTCi in the last 30 years, pricing for this form of insurance has stabilized and is an effective means of insuring against the potential catastrophic costs of long-term care. This coverage can be obtained as a standalone LTCi policy or in combination with certain life insurance and annuity policies.
Guaranteed lifetime income sources
Having late-in-life guaranteed lifetime income sources is another way to pay for ongoing medical expenses in retirement. As we grow older, we tend to have more need for medical solutions and services. And just because AI may possibly increase a retiree’s lifespan, it does not necessarily follow that medical costs will cease or go down. Instead, longer lifespans will come at a cost. This is a planning concern.
One strategy that can help create later-in-life guaranteed income is a qualified legacy annuity contract (QLAC). When QLACs were introduced by Congress in 2014, the industry viewed this approach as a way to avoid required minimum distributions. An individual could take their 401(k) or IRA accounts and purchase a life-income annuity that wouldn’t begin to pay a monthly income until later in life, generally age 75 to 85. Only then would the individual have to take required minimum distributions from the account.
However, QLACs can be far more helpful than just putting off paying taxes.
A pre-retiree who anticipates a very long retirement could invest up to $200,000 of their qualified retirement accounts in a QLAC. The annuity contract will start paying out a guaranteed-for-life monthly income later in life when the risks discussed above (Medicare, long-term care, and living longer than anticipated) are especially concerning.
The conversation that can’t wait
Will AI magically cause us to live longer in retirement? We don’t know, but we do know that life expectancies have been increasing over the years. The Nationwide survey tells us two-thirds of Americans are terrified about medical costs in retirement. Living longer, wonderful as this sounds, may increase the terror about paying medical costs. Advisors need to have this conversation with their clients, and address potential shortfalls now.
Steve Parrish, JD, RICP, CLU, ChFC, AEP, is the co-director of the Center for Retirement Income at The American College of Financial Services, where he also serves as an adjunct professor of advanced planning. With over 45 years’ experience as an attorney and financial planner, Parrish frequently addresses the financial challenges of individuals, business owners, and executives nationwide.
