Are there other strategies for managing your health and wealth? - Barron's

Plenty has been said about the difficulty of investing for -- and in -- retirement. Safe, reliable, income-producing investments are harder and harder to come by, forcing many investors to take more risk than they're comfortable with. But that's not the biggest problem.

There's a sea change afoot in the retirement arena, and it's as much about your physical health as your financial health. Health-care costs are eating up an ever bigger chunk of retirees' nest eggs, and if you're not factoring that into your retirement savings strategy, you could be setting yourself up for a nasty financial shock. According to Fidelity, the average 65-year-old couple retiring this year will need $220,000 to cover medical expenses through retirement.

And that doesn't include nursing-home care, which averages $50,000 a year, according to AARP. But if you think that sounds high, the financial advisors in Barron's first Health and Wealth Roundtable say more-affluent retirees should brace themselves for even higher costs to maintain the level of care they're used to.

And the news gets worse from there. Large companies are slashing health benefits for retirees. In the past few weeks, General Electric, IBM, Duke Energy, and Time Warner announced they're eliminating or cutting benefits for current and future retirees, steering them toward a privately run exchange similar to those created under the 2010 Affordable Care Act. The act requires states to run their own exchanges, through which uninsured Americans will buy health-insurance plans on their own, many of which will be subsidized by the federal government. Private insurance exchanges will be partially subsidized by the employer, rather than by Uncle Sam.

And last week, Walgreen announced that it would no longer provide employees with health benefits; instead, it is sending workers to purchase their own insurance via a private exchange -- a sign that it's never too early to think about how your health-care costs will affect your future.

Fitting together the pieces of a comprehensive strategy for your health and wealth amid all this is tricky. Long-term-care insurance, lifestyle communities, concierge services, and health-care advocates can all play a role. To help us sort through the options, Barron's turned to three experts in the field:

Ken Schles for Barron's

Our panel of experts, from left: Independent advisor Kim Ciccarelli Kantor, Missy Spickler of Merrill Lynch, and Mary Deatherage of Morgan Stanley.

Melissa Spickler is a managing director at Merrill Lynch in Bloomfield Hills, Mich. She has been advising clients for 34 years, and has increasingly expanded her practice to include health-related issues, insisting, for instance, that all clients consider long-term-care insurance.

Mary Deatherage is a managing director at Morgan Stanley in New York City and Little Falls, N.J., and has been with the firm for 27 years. Her focus is on wealth planning, which includes portfolio management, as well as other ways to preserve wealth in retirement.

Kim Ciccarelli Kantor is an independent advisor and co-founder and president of Ciccarelli Advisory Services in Naples, Fla. Not surprisingly given her location, many of her clients are nearing or in retirement, but like the others, she has worked with families over multiple generations for more than 30 years.

All agreed that a healthy and happy retirement is more about smart spending early on and even before retirement, than it is about strategic investing. Managing your current health care, anticipating future needs, and ensuring that your housing is right should all be included in a plan for a robust retirement. But the conversation both began and ended with the importance of being organized, and communicating with your family across all generations.

Barron's: Let's start broad. What are the biggest issues in managing both health and wealth?

Deatherage: Longevity risk. Our clients, many of whom are aging baby boomers, are worried about maintaining their wealth in retirement while living the lifestyle they want, and still being able to pass their wealth on to the next generation.

Kantor: Maintaining their lifestyle is very important to them -- for as long as they can before long-term care is needed.

Financial advisor Missy Spickler explains why you are likely to get far more in benefits than you pay in premiums.

Spickler: People think that they are impervious to everything, so health issues seem to pop up without any notice. Then, they often need to make decisions quickly, and they're not prepared.

What are people not prepared for?

Spickler: Dementia. I talk to clients, and I sense that they don't remember that they've already spoken to me that day. When I talk to the client's children, they are in complete denial. So it seems to come out of nowhere, but it is not really out of nowhere for me.

So you are in the position of letting children know how their parents are doing.

Spickler: I have to let them know. It would be a disservice if I didn't quietly mention that I sense something.

Kantor: This is a major concern for us, in particular, because many of our clients have moved [to Florida] to retire and have children that live all over the country.

Ken Schles for Barron's

Kim Ciccarelli Kantor, an independent advisor in Naples, Fla., emphasizes clients' ability to maintain their lifestyle for as long as possible.

Deatherage: I just had a conversation with the children of one our clients, telling them that their father shouldn't drive anymore. I said, "When was the last time you were in the car with your dad? I was in the car with him today, and it wasn't pretty." They were surprised.

So how do you start involving the family? Do you make the conversation about the older generation, or do you encourage the younger generation to do more than just save for retirement?

Kantor: We start talking to people about their own situation in their 40s.

Deatherage: Planning for health issues is a conversation I have with every single client from probably 50 years old on.

Spickler: I start this conversation early and often, and I repeat myself.

Where do you start?

Spickler: Long-term-care coverage. It is my first line of defense. We use a hybrid product from Lincoln National. You pay a lump sum upfront, and get three to four times that amount in long-term-care coverage, depending on your age. There's also a death benefit. And you can get 100% of your initial investment back after six years, with no penalty.

Deatherage: I have a rule of thumb: If you are wealthy enough to be able to handle the high cost of long-term-care coverage, you don't really need it. Plus, the percentage of people who actually need real long-term care is pretty low. If you have Alzheimer's in your family, though, that's a whole different picture.

Financial advisor Kim Ciccarelli Kantor lays out the medical expenses you should save for as you look ahead to retirement.

Missy, do you agree that some clients are so wealthy they don't need long-term-care insurance?

Spickler: I think it is really important to offer long-term-care insurance, for a myriad of reasons. People think they are invincible and nothing will happen to them, but you never know what will prompt the need for long-term care, or how much that care will cost. One of my clients fought me on getting long-term-care insurance. He was a runner and a health nut, but two weeks ago, at age 58, he had a stroke and is paralyzed on his left side. He is now is in a nursing home. I have another client, 60 years old, who I thought needed long-term care because she was recently divorced and her daughter lived out of state. She dove into a pool and broke her leg in three places. She couldn't walk for five months -- the insurance will cover her recovery period.

OK, so people aren't invincible. But if you can afford to pay your health-care costs without insurance, why do you need it?

Spickler: I have clients who are very, very wealthy -- assets of $30 million and up -- who ask the same thing. And I've said, "Why not buy a $250,000 policy that will create $800,000 in coverage for a nursing home, so you can leave that $550,000 to your children or a charity instead?"

That's still a big upfront cost. Why not a more traditional policy with an annual premium?

Spickler: The reason I like this is because I can carve out, say, $100,000, and put it into this bucket, and know that it is specifically earmarked for long-term care. There are no future payments that could be subject to price increases; it's a one-time payment. And you don't have to worry about passing a physical 10 years down the road.

Ken Schles for Barron's

Mary Deatherage of Morgan Stanley in Little Falls, N.J.

Kantor: That's the most important piece of it. You're creating that bucket of assets, and leveraging it. That initial payment becomes a much larger payout in the form of long-term-care payments or a death benefit. I'm not a proponent for the "must have" camp or the "don't need" camp. I think it can work in some situations as a supplement.

Deatherage: I'll use it to give some clients peace of mind.

But you're not a big fan.

Deatherage: Long-term-care insurance is a long-term investment. And I'm enough of a cynic to wonder if these insurance companies will back the policies they write today 30 years from now.

Kantor: I worry about the same thing. In 2008, there were 14 long-term insurance carriers; six have since left the business. Plus, we have no idea if the policies put in place today for a 50-year-old will be what they want covered when they're 80 or 90.

In other words, the policies that are written today may not reflect the latest in medical advancements 30 years from now?

Deatherage: We can't know what the future financial model will look like as all these baby boomers converge on the system. Japan, which has the oldest living population in the world, is looking at using medical robots in their nursing homes because there are not enough human beings to do the work.

Kantor: Some of the new lifestyle communities are requiring long-term care. It used to be that if you were going to become a part of the community, you didn't need long-term-care insurance.

You're referring to assisted-living communities?

Deatherage: "Life care" or "continuing care" communities are places where you start when you're still living independently, with a car. You start living independently, but within a community, having happy hour with your friends before you all go down to dinner together. You might move on to assisted living, and you could also move on to full-time, skilled nursing care in the same facility. The idea is that you remain a part of the community; your friends will continue to visit you.

A lot of people are resistant to moving.

Deatherage: I had clients that lived in a house that was so dark and dingy, my solar-powered calculator couldn't work indoors. They lost their driver's licenses because they couldn't drive safely anymore. They eventually moved to a life-care community, where the wife, who used to be a concert pianist, began playing for the whole crew regularly. They went out to dinner all the time. They saw plays in New York. They couldn't keep track of their social agenda. I just smile thinking about it. The years before they moved were so sad and lonely, but their last years were so fruitful and fun. It's a great solution for the right people.

Kantor: We have clients who purchase into lifestyle communities to qualify for them, but don't plan on moving there immediately. Especially those in a second or third marriage; they are concerned that if they need assisted living or nursing-home care, what assets will provide that -- theirs or their spouses? What will they leave their children? This is a way to prepare for that and preserve their assets.

What are the costs involved?

Deatherage: It really depends. In northern New Jersey, anywhere from $250,000 to maybe $1 million for a cottage. You may or may not actually own the property; some contracts allow your heirs to get 80% to 90% of what you put in. But then you pay on top of that. Monthly fees can run from as low as $2,000 to $20,000. A lot of times, that fee includes a pro-rated cost of the greater amount of care you're likely to need in the future. So in some cases you're pre-paying part of those costs.

So how much do people need to cover their health-care expenses?

Kantor: Half a million.

Spickler: An average, healthy couple that's 65 today will need about $250,000 just to cover routine health-care costs -- that doesn't include long-term care or medical emergencies. It's good to have a larger sum of money on the sidelines, not participating in the stock market.

Deatherage: True, but that's a little scary in the zero-percent [interest rate] world.

Kantor: Planning for health care is tricky because you don't know when you'll need it, but when you do, you need it right away. It's not like saving for college.

That's a good point -- you may know when you'd like to retire, but most people won't know when they'll be socked with a big medical bill. How do you manage a portfolio accordingly?

Spickler: I put money in silos, so to speak -- there's one account that creates the income needed to live on. If you know there are 10 trips you want to take in the next five years, I'll keep that in another account. But you need a silo that is really just for medical care, including unexpected expenses. Most of that is in cash.

Deatherage: I'm from New Jersey, and last year, guess what we learned [after Hurricane Sandy]? No one had adequate flood coverage. You need at least one year of living expenses, in some sort of liquid investments like CDs or short-term bonds.

Are there other strategies for managing your health and wealth?

Spickler: Health-care advocates are often retired nurses or people who have left the medical field. They work off a retainer, giving you advice about your long-term-care needs, finding a doctor, where you should go for various issues.

Kantor: They bring a great level of communication to the family.

Deatherage: There's another trend of platinum plans, or concierge plans. It's a one-stop shop for your medical needs. It's getting a lot more interest from our higher-net-worth clients because they want the attention that is being denied to them by the size of the health-care system. Doctors love them because they can control the patient base and get paid well to be on call for a finite number of patients. I have seen annual fees as low as $3,000.

Ken Schles for Barron's

Missy Spickler of Merrill Lynch in Bloomfield Hills, Mich., is a big proponent of long-term-care insurance for her clients.

Kantor: And as high as $17,000 a year.

What issues can retirees expect to see crop up?

Deatherage: You know it's funny, every week the best-seller list has What to Expect When You're Expecting. Nobody's written What to Expect When You're Aging. Now, there are many iterations as to what happens when you age, but people are very confused about it. I've had clients actually say to me, "What will happen...?" and I now know what they mean is "...when I die?" They want to know that if you are at home, you are typically going to be in bed. Your family will call an ambulance that will come and confirm, and they'll need to contact the funeral home you chose, etc.

Spickler: I just gave a seminar teaching clients to make sure you know where your spouse's passwords are, if there's military paperwork needed for burial with military honors. There are so many things that people don't have in one spot. It's never too soon. One client I met with very recently was about to retire and we were talking about 401(k) withdrawals. He retired on Friday and died on Sunday.

Deatherage: I tell clients all the time, put all your important documents -- living will, health-care proxy, power of attorney, Army-discharge papers, anything you might need in an emergency (but not your will, which you should only have one copy of) -- in a Ziploc bag in the refrigerator. Stick it behind the ketchup. When something goes wrong, you don't want to go to the bank, or you can't find the key to the safe deposit box. Plus, the ambulance drivers, after they take care of you, the first thing they do is open the refrigerator to look for medication. And they know to look for papers. But a lot of times, our spreadsheet -- which tracks all their accounts -- becomes a road map, and family members will tick down our net-worth statement because that's the only place that ever aggregated all their assets.

Thanks, ladies.

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