Will health and aged care bankrupt retirement?

Submitted by Louise Biti on Mon, 31/05/2010 - 1:04pm
in

Government, industry and the community are all finally focussing attention on the issues of longevity and the pressure it places on retirement funding.

New income stream products are starting to emerge that will provide clients with some protection against a long lifespan. But until clients grasp the reality of just how long they can live in retirement and how much it may cost them, we will struggle to deal with the problems satisfactorily.

A 65-year-old couple retiring this year will need a quarter of a million dollars to pay for medical expenses throughout retirement according to Fidelity Investments Annual Retiree Healthcare Costs Estimate. This is based on a US experience but in Australia the costs of aged care and medical expenses (including insurance and gap payments) can also create a significant financial burden. The average accommodation bond for low-level care in capital cities is around $350,000 and is increasing.

Most clients are not doing enough to plan for these expenses and do not understand just how long they could expect to live. Not only are Australians as a total population living longer but individuals are increasingly outliving the statistical life expectancies.

New products will help to solve the problems but planners cannot wait for products to solve all the problems. Financial planners need to implement solid financial planning strategies for retirees that include the following steps:

  • Step 1 – accumulation of sufficient savings
  • Step 2 – appropriate asset allocation
  • Step 3 – management of income drawdown
  • Step 4 – rebalancing strategy

This process requires ongoing management for the client and will help to create an ongoing value proposition for advice.

Products fit in as one part of the solution but the cost of the guarantees may be expensive. The guarantees can be attractive to clients but only if a full cost analysis has been considered and disclosed so that the client can determine whether the cost represents value for the peace of mind they receive.

The challenge is whether you as a financial planner really understand the longevity risk and can incorporate appropriate discussions and strategies into your advice process.

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The information contained in this publication is based on the understanding Strategy Steps Pty Ltd ABN 14130045242 AFSL 333649 has of the relevant Australian legislation as at the date shown in this publication. The information contained in this publication is of a general nature only and is intended for use by financial advisers and other licensed professionals only. It must not be handed to clients for their keeping nor can any copies of sections of this publication be given to clients. Strategy Steps is not a registered tax agent under the Tax Agent Services Act 2009. We recommend that your client be referred to their registered tax agent or legal adviser prior to implementing any recommendations that you may make based on the information contained in this publication.