The HealthView team is currently preparing for our role in this year’s upcoming National Retirement Week, which will take place from April 13 – 17. The purpose of this industry-wide effort is to help investors address their most important financial needs in retirement.
For the first time, an entire day is being dedicated to the topic of health care in retirement, and HealthView will be leading that effort.
Why such an intensive focus on health care? Current and future retirees consistently rate future health care expenses as one of their top concerns, and they are reaching out to financial advisors for help. Our objective has always been to provide industry professionals with the tools and education necessary to help investors manage these costs, and we look forward to bringing this critical retirement issue to center stage.
One topic that we recently covered in a new white paper is how health care costs continue to grow at a multiple of inflation, and this trend may have a significant impact on retiring Americans over the next several decades. (For now, I’ll use the Consumer Price Index for comparison.)
Here’s the good news: in 2014, health care costs grew at a rate of 3.6%.
Here’s the bad news: in 2014, health care costs grew at a rate of 3.6%.
Here’s the conundrum: a 3.6% health care inflation rate is dramatically lower than our historical average of approximately 6% or more. However, even though the rise was modest, it was still four times the CPI growth rate of 0.8%.
Here’s the real concern: what if inflation in the U.S. rises to (what has been an historical average of) around 3%? Even at a multiple of two, health care inflation would grow at 6%. At a multiple of three, we would be subject to a 9% health care inflation rate.
Not realistic? Look at this chart.
|Year||Health Care Inflation Rate|
How about this: over the past fifty years, excluding the Great Recession of 2008, health care inflation has, on average, exceeded a rate of 6% annually. Not surprisingly, actuaries are projecting health care costs to once again grow at a 6% rate of inflation into the foreseeable future. Total average lifetime health care costs including all premiums, co-pays and non-covered items such as hearing, vision and dental will cost a 65 year old couple retiring today $394,954 in today’s dollars.
Want another perspective? Let’s examine how health care costs will slowly erode Social Security income.
A couple retiring today generating an average of $25,332 in Social Security income with a 2% COLA will need to allocate 67% of that lifetime income to pay for projected health care costs. By the time this couple reaches age 85, over 80% of their annual Social Security income will be consumed by health care.
Looking down the road, a healthy 55-year-old couple retiring in 10 years will need to allocate 90% of lifetime Social Security income to pay for health care expenses.
This doesn’t exactly leave much for housing, food, transportation, or trips to the Caribbean.
What makes matters worse is that both couples mentioned above have optimized their benefits at what is known as Full Retirement Age (FRA). What compounds the problem is that many people don’t understand claiming strategies and file at the wrong time which can leave tens of thousands of dollars in Social Security income on the table.
But what if someone were earning maximum Social Security benefits? That would obviously significantly lower the impact of health care costs on Social Security income, right?
Because of means testing, those in the highest Medicare income bracket are subject to income surcharges on Parts B and D. Affluent beneficiaries – before being subjected to co-pays and other out of pocket expenses – will see Part B premiums and all surcharges directly deducted from their Social Security checks. This can consume one third or more of their annual benefit.
(On a side note, President Obama’s most recent budget proposal calls for adding a surcharge to supplemental insurance, which will “complement” the current surcharges on Parts B and D. Just keep this in mind: the more you earn, the more you will pay for health care.)
Is it wise to ignore health care costs in retirement? Of course not. What quality of life can a senior citizen have without access to health care? In truth, planning for health care is as important as saving for housing and food.
So what can a future retiree do? Start saving now to ensure basic coverage (Medicare Parts A, B, and D). Here’s one approach:
There’s no need to save for Medicare Part A because those premium costs have already been deducted from salaries throughout our working careers. Part B premiums will be taken directly from Social Security checks. Therefore, for now, let’s focus on Part D, which covers prescription drugs. The table below provides some general guidance on how to prepare.
|Age||Monthly Part D Savings*|
*Based on a 6% return
If a 55-year-old saves $40,134 in a lump or $5,144 annually, they will have the peace of mind knowing that hospitalization, doctor visits, and prescription drug premiums will be covered throughout retirement.
Of course more affluent investors may have the resources to save enough to afford supplemental insurance premiums, and also be able to save for other out-of-pockets expenses, such as hearing, vision and dental.
Affluent investors can also take advantage of several investment types, including non-qualified annuities and life insurance products, which can be utilized to actually lower or eliminate Medicare surcharges. A 55 year old affluent couple may be responsible for as much as $279,377 in Medicare surcharges (in today’s dollars).
Bottom line: anyone who wants to be able to enjoy financial security in retirement needs information on these topics.
We welcome you to sign up for the Health Care in Retirement CE Webinar on April 16 at 2:00pm Eastern.