The good news is that overall post-retirement health care inflation is projected to rise at a slower rate for the foreseeable future. However, it’s also apparent that increasingly, future retirees will have to deal with lower Social Security and Medicare benefits.
The updated figures come from HealthView Services’ 2018 Retirement Health Care Costs Data Report, which shows overall post-retirement health care inflation declining to a projected 4.22%, compared with 5.47% in the 2017 report — a change that is driven primarily by a slower rate of increase in projected drug costs.
As a result, total lifetime retirement health care expenses for an average healthy 65-year-old couple retiring this year are projected to be $363,946 in today’s dollars ($537,334 future value). This is compared to the projected totals in last year’s report of $404,253 and $607,662 respectively. These figures include Medicare Part B and Part D premiums, supplemental insurance (Plan G), dental insurance, co-pays and out-of-pocket costs for medical care, prescriptions, dental, hearing and vision.
The report further notes that for Medicare, supplemental insurance and dental premiums alone, health care expenses are expected to be $281,847.
The slower rate of increase in expected drug costs accompanied by an increase in provider shared-savings arrangements have lowered the projected average inflation rate for Medicare Part D to 4.5% in this year’s report from 8% in 2017. Medicare Part B is projected to rise at 4.7%; supplemental insurance, including average annual age rating, is projected to rise at 5.65%.
Social Security Percentage
The report estimates that a healthy 66-year-old couple retiring today will need 48% of their lifetime Social Security benefits to address total lifetime health care expenses. This is down from 59% in last year’s report.
A 55-year-old healthy couple will need 57% of their benefits to cover health care costs; a 45-year-old couple will need 63%. Both of these levels are down significantly from the numbers in last year’s report.
Nevertheless, retirees still need to plan for health care costs increasing significantly during retirement, the report warns. While the 66-year-old couple will require 35% of their Social Security benefit at retirement for premiums, copays and out-of-pocket costs, at age 85 these expenses will be 158% higher in dollar terms, amounting to 56% of their future projected Social Security benefits.
Cost Shifting
Moreover, the report notes that due to the removal of “file restricted” and “file and suspend” Social Security strategies, the average 58-year-old American couple will lose an estimated $37,000 ($72,000 in future value) in total lifetime benefits. In addition, the lowering of Medicare means-testing brackets will add $57,000 in additional lifetime surcharges for a 40-year-old male earning $93,000 today.
The report further warns about the cost of greater-than-expected longevity and the impact of health conditions on future expenses. For example, if a 65-year-old couple lives an extra two years beyond their projected actuarial longevity, they will incur an additional $37,423 (net present value) in total health care costs.
Bear in mind that these overall costs do not include estimates for long-term care. Of course there are significant cost differences based on region, but according to Genworth’s 2017 Cost of Care Study, the median annual cost for nursing home care was $85,775 for a semi-private room and $97,455 for a private room.
Retirement Planning
HealthView emphasizes the importance of including health conditions in retirement planning and how savings from improved health can be used to reduce the burden of health care expenses in retirement. In an earlier case study, the report explains how a 55-year-old man with Type II diabetes who takes steps to improve his health could reduce his average annual out-of-pocket costs by an actuarially calculated pre-retirement average of $4,259. If the person were to invest in a savings vehicle generating a net return of 6%, the person would increase their retirement savings by $56,763.
“The simple idea of improving the management of health conditions and investing the savings underscores a key point — taking retirement health care off the table as a concern is an achievable goal,” notes Ron Mastrogiovanni, CEO of HealthView Services and HealthyCapital. “As the report shows, small steps to better manage health or modest increases in monthly 401(k) contributions can significantly reduce the burden of health care in retirement.”
A recent consumer survey of affluent U.S. adults by Nationwide underscores the point of including health care costs in retirement planning. Large majorities of adults cite out-of-control health care costs as one of their top fears in retirement, as many cannot estimate annual health care costs in retirement and they are concerned they will not have enough money to cover unplanned medical expenses.
