Health care costs in retirement
are rising twice as fast as the average annual increase in Social Security
benefits, putting a crucial source of retirement income on a collision course
with one of the biggest expenses retirees face. Over time, retiree health care
costs for today's workers could exceed their gross Social Security payments.
The third annual "Retirement
Health Care Data Report" projects that lifetime health care premiums for
Medicare Parts B and D, supplemental Medigap insurance and dental insurance for
an average 65-year-old couple retiring this year is $321,994 in today's
dollars. When deductibles, copays, hearing, vision and dental out-of-pocket
costs are added, total lifetime retirement health care costs could top
$400,000, according to HealthView Services, which produces health care
cost-projection software for financial advisers and financial institutions.
While the numbers are eye
popping, HealthView Services chief executive Ron Mastrogiovanni says financial
advisers should not dismiss them as outlandish or fail to incorporate them into
a retirement income plan, particularly considering the current emphasis on
fiduciary duty and acting in clients' best interests.
"Although these numbers may
seem out of reach, the savings required to cover health care when meeting
retirement savings goals are often more modest that might be expected,"
Mr. Mastrogiovanni said.
For example, a 55-year-old who is
already on track to replace about 85% of his pre-retirement income could
increase his 401(k) contributions by as little as $17 per paycheck to address
his retirement health premiums, assuming a company match of 50%. The report
highlights steps, including managing health conditions, individuals can take to
anticipate, manage and reduce costs.
The proper mix of savings
vehicles can play an important role in future retirement income and its
impact on health care costs.
A client who is stashing all of
his retirement savings into a traditional 401(k) may be better off splitting
his contributions between a tax-deferred plan and a Roth 401(k) plan that would
offer tax-free distributions in retirement, Mr. Mastrogiovanni said. Fully
funding a health savings account during one's working years is another way to
increase tax-free sources of income in retirement. HSAs offer a triple tax
break: Contributions are tax deductible; savings grow tax-free; and
distributions are tax-free when used to pay for medical expenses.
The principal driver behind
rising medical expenses continues to be retirement health care inflation
related to Medicare Parts B and D, supplemental insurance and cost sharing, the
report said. The standard Medicare Part B premium, which pays for doctors' fees
and outpatient services, rose 10% from $121.80 in 2016 to $134 per month for
new enrollees in Medicare in 2017.
Most Medicare beneficiaries who
enrolled before this year pay less because of a "hold harmless"
provision that prevents their Medicare Part B premiums from increasing more
than the annual increase in their Social Security benefits. With a paltry 0.3%
increase in Social Security benefits in 2017, most Medicare beneficiaries paid
about $5 more per month for Medicare Part B this year.
But Medicare enrollees who are
not collecting Social Security, including those who chose to delay claiming
Social Security benefits until they are worth more at an older age, had to pay
the full 10% increase in Medicare Part B premiums this year. And high-income retirees,
defined as individuals with modified adjusted gross income (MAGI) above $85,000
and married couples with MAGIs topping $170,000 had to pay a lot more for
premiums for both Medicare Part B and Medicare Part D, which covers
prescription drugs. Distributions from Roth accounts and HSAs are not included
in MAGI.
HealthView projects the annual
retirement health care inflation rate will average 5.47% for the foreseeable
future. That is almost triple the U.S. inflation rate of 1.9% between 2012 to
2016 and more than double the projected Social Security cost-of-living
adjustments (COLAs) of 2.6%, according to the latest Social Security Trustees'
Report.
Larger Social Security COLAs in
the near future means the hold harmless provision is unlikely to be invoked. As
a result, retirees will pay the full Medicare premium hikes each year, further
chipping away at their Social Security benefits.
The HealthView Services report
shows that a 66-year-old couple retiring this year will require 59% of their
Social Security benefits to cover total lifetime retirement health care costs.
A 55-year old couple retiring at 66 will need 92% of their Social Security
benefits, and a 45-year-old couple retiring more than 20 years from now will
need more than their total Socials Security benefits — 122% — to cover health
care.
"Homes can be downsized and
vacations reduced when budgets are tight, but health care premiums and other
out-of-pocket costs are not an optional expense," Mr. Mastrogiovanni said.
"The report's data provide a starting point on how to effectively address
these expenses."
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