Safety First Retirement Plans and Health Care Costs – Are these two items compatible?

Two major approaches for retiree financial planning are the creation of (1) Probability Based Retirement Plans and (2) Safety First Retirement Plans

Very briefly, what are these two approaches?

Probability Based Retirement Plans calculate (usually using Monte Carlo techniques) the probability that the client will meet his various financial goals, including the goal of not outliving his assets.  This technique takes into (or should take into) account all of the financial aspects of the retiree’s plan.  The goals can be examined together or prioritized and examined separately.

Safety First Retirement Plans involve segregating the goals of the retiree into needs and wants.   The plan first makes sure that the needs are met.  Assets are devoted to the satisfaction of the needs.  Often guaranteed annuity/insurance products are employed to meet these goals.  Inherent in these strategies is the assumption that the amount of assets to meet goals can be determined or at least estimated within a small range.  Once the needs are met, then the wants can be examined.  The wants could be or not be satisfied, depending on many factors, including the size of the client’s asset portfolio.

The trouble with safety first strategies is that the requirement that the amount of assets needed to meet future health costs be determined or  at least estimated within a small range is not met.  Health care costs can vary a great deal over the course of a retiree’s lifetime, from a small amount to well over a million dollars.  That makes it almost impossible to rationally allocate the amount of assets to that need (and health care costs are a need and not a want).

Is it possible to employ insurance or annuities to reduce the variability of costs associated with health care? 

The retiree can buy Medicare Part D or a Medicare Advantage Plan, as well as Medicare Supplement Part F.  In some cases, this would reduce some of the variability associated with some health care costs, but not fully.

However, it is rarely possible to reduce the variability of the costs associated with long-term care.  The only possible way I see is to purchase long-term care insurance with an unlimited benefit period and with a 5% inflation rider.  Unpaid help is not a reasonable approach for the most difficult and costly long-term care needed.

The troubles with this insurance approach are:

More than half of retirees are simply not insurable for long-term care insurance.

Unlimited benefit periods are rarely available now, partly because the insurance companies who have sold this have lost money on unlimited benefit policies.

The premiums are very high and not suitable for all but the very wealthy.  Also, there is the real risk that the insurance company may raise the premiums after purchase.

Certain long-term care events are not covered by most long-term care policies

In summary, safety first strategies run into problems, often insurmountable, because of the variable and potentially extremely high cost of long-term care.

Therefore, I strongly recommend retirement plans constructed using safety first strategies be tested using probability tests, due to health care costs! 

Only PDRP Plus has the capability to correctly probability test plans, since it is the only system to correctly incorporate health care costs into its Monte Carlo testing.