Advisers should add health portfolios to retirement plans

New research from the Massachusetts Institute of Technology AgeLab recommends that financial advisers include a defined ‘health portfolio’ in clients’ retirement plans. The paper argues that health behaviors and spending influence how long people live, their quality of life and retirement budgets.

The study, authored by AgeLab director Joseph Coughlin and scheduled for publication in October in the Retirement Management Journal, links longer lifespans and rising health-care costs to the need for integrated planning. Coughlin wrote that ‘physical inactivity, once treated as a personal preference, is increasingly understood as a modifiable financial risk,’ and added that ‘the behavioral investments individuals make in their bodies today are among the most consequential financial decisions they will make for their older self tomorrow.’

Coughlin recommends grouping client actions and spending into three categories within a ‘health portfolio.’ Preventive measures include screenings and vaccinations. Performance measures cover fitness, nutrition and sleep tracking. Protective measures refer to insurance and savings for major treatments. The paper compares managing health investments over time to rebalancing a financial portfolio as objectives and time horizons change.

The report notes many advisers do not raise health topics even though clients already make regular health-related purchases such as gym memberships, fitness classes and supplements. Coughlin suggested advisers open the conversation by asking whether a client belongs to a gym, gets preventive screenings or tracks sleep, and by having clients list and classify regular health spending.

Advisers who have added health conversations report practical effects on planning. Bradford Houchins, a senior vice president at River Wealth Advisors in Camp Hill, Pennsylvania, said many clients plan to improve their health only after retirement. He observed, ‘They’re waiting until the best time of their lives to then get healthier instead of getting healthier for the best time of their life.’ Houchins described clients who schedule cataract or knee surgeries before travel and who use prehabilitation to speed recovery. He said advisers can help estimate recovery time, plan payment and decide whether to set aside assets ahead of health events.

The paper highlights health savings accounts as a savings vehicle for medical costs in retirement. Houchins described HSAs as ‘fantastic’ for retirement saving and noted their tax advantages and flexibility for future health expenses.

The AgeLab paper recommends advisers document current health spending and future medical expectations and incorporate those items into retirement projections. It suggests treating health behaviors and related expenditures as part of lifecycle planning so projected spending, insurance needs and timing of withdrawals reflect likely health events.