Well-prepared baby boomers, cognizant of projected rising costs of health care in retirement, may still be shocked by how much their wellness will cost in their later years.
Health care inflation, greater cost-sharing, and means testing for wealthier Medicare beneficiaries going forward have conspired to put retiree health care costs on a path to exceed Social Security benefits for many Americans.
A white paper from HealthView Services says that many retirement advisors have yet to meaningfully account for projected health care costs.
“Until recently, retirement health care costs haven’t been included in retirement planning for several reasons. First of all, many clients mistakenly believe that Medicare will cover all or part of their health care costs in retirement,” said Ron Mastrogiovanni, CEO of HealthView Services. “Meanwhile, their advisors — who have been focused on rebuilding assets following the financial crisis — haven’t had the tools to calculate healthcare costs for individuals.”
Consequently, the need to address the “retirement health care cost-planning gap” is urgent.
The paper (Addressing the Retirement Health Care Cost Crisis: Cost Management Strategies) theorizes that the issue is much less a problem of advisor and client awareness, but more one of process, or specifically, the tools to generate actionable information on which to build a strategy.
Data cited from Credit Suisse says health care comprised 33 percent of all household expenditure for people over 60, while data from Merrill Lynch shows that the majority of affluent Americans, who tend to be well-versed investors, claim health care as their top financial concern in retirement.
Still, there is room for greater awareness. Baby boomers are often surprised to learn that Medicare only covers approximately 51 percent of total health care expenses, according to the paper. But it’s the rise in Medicare premiums that yields the most startling responses.
The paper takes a hypothetical couple, aged 55 and living in Massachusetts, that expects to retire in 10 years at age 65. Assuming they buy into Medicare Parts B, D, and Medigap coverage, the couple will see premiums double to $22,981 a year in 2034, when they are 75, and to a remarkable $46,568 in 2044, when they are 85.
The paper uses data from the Heritage Foundation to support its thesis that Medicare beneficiaries are going to have to pick up more of their health care bills going forward.
Medicare, already the fastest-growing federal liability, already accounts for 15 percent of the nation’s budget. In the next 10 years, Medicare spending is expected to double, reaching over $1 trillion by 2023.
HealthView estimates that Medicare means testing, which will place higher premium costs on wealthier Americans, already impacts 35 percent of advisors’ clients.
Its paper suggests advisors work with clients to understand their life expectancy as best they can, taking into account chronic conditions like diabetes to best project a savings plan.
Structuring assets into investment vehicles that won’t increase annual income can protect wealthier Americans from means-tested increases to their Medicare costs, the paper noted. Also, proceeds from a Roth IRA are not counted toward annual income when means-adjustments are made.
Maximizing Social Security by delaying benefits could add as much as $100,000 in value over the course of retirement, money that could go a long way to defraying health care inflation.
And then there is the paper’s final suggestion – so inconceivable to boomers just a few years ago – that they’re hearing more of these days: keep working into retirement.
Also read: 7 retirement risks to consider closest