by Mary Beth Franklin, Investment News 6/19/2017
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 will be $321,994 in today’s dollars. When deductibles, copays, hearing, vision and dental out-ofpocket 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 CEO 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 than might be expected,” he said.
For example, a 55-year-old who’s already on track to replace about 85% of his preretirement 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 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 benefits until they are worth more at an older age, had to pay the full 10% increase in Medicare Part B premiums. 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.
TRIPLE THE INFLATION RATE
HealthView projects that the annual retirement health care inflation rate will average 5.5% for the foreseeable future. That is almost triple the U.S. inflation rate of 1.9% from 2012 to 2016, and more than double the projected Social Security cost-of-living adjustments of 2.6%.
Larger Social Security COLAs in the near future mean the hold-harmless provision is unlikely to be invoked. As a result, retirees will pay the full Medicare premium hike 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 need 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 benefits, and a 45-year-old couple retiring more than 20 years from now will need more than their total Social 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.”