CAPTRUST Senior Director | Marketing
How would you feel if your monthly Social Security payment went solely toward paying your retirement healthcare expenses? HealthView Services, a Boston-based provider of healthcare-oriented retirement planning software, claims that’s not such a farfetched idea. The company has created a Retirement Healthcare Cost Index © that measures “the percentage of Social Security benefits required to pay for healthcare-related costs in retirement for a healthy couple receiving the average expected Social Security benefit at full retirement age.”1 According to the HealthView index, for a couple retiring today, 69 percent of Social Security benefits will go toward retirement healthcare expenses. For a couple retiring in ten years, that number rises to 98 percent.2
With expected retirement healthcare costs at this level and expected to increase, it’s easy to understand why 86 percent of Americans are “wondering whether they will be able to cover them.”3 Some of their wonderment may stem from the size and wide range of estimated healthcare expenses. Some may result from a limited understanding of the cost of retiree healthcare insurance — including Medicare premium costs. Some may result from a limited grasp of which expenses are (and are not) covered under Medicare and related insurance.
Regardless, given that healthcare costs are expected to remain a critical challenge for retirees, it is important that they keep the following issues in mind:
• Expense estimates are significant. Pundits estimate healthcare expenses for a couple on the brink of retirement to range from around $150,000 to more than $360,000 — or $10,000 to $12,000 per person per year of retirement based upon national averages. These calculations include premiums for Medicare Parts B and D, Medicare supplement insurance (otherwise known as Medigap), and out-of-pocket costs such as co-pays not covered by Medicare.
Why the big disparity? In some cases, estimates include more coverage, such as additional costs for dental and vision care insurance. In all cases, these calculations include a healthcare inflation assumption, typically between 4 and 7 percent. At two to three times higher than general inflation measures such as the consumer price index — and compounded over more than twenty years of retirement — variations in these assumptions create the large disparity.
• Most people overestimate coverage and underestimate expenses. Many Americans believe that Medicare will pay for most, if not all, of their retirement healthcare spending. In reality, Medicare pays on average about 50 percent of healthcare costs, leaving the retiree to pay the remainder.4 To make matters worse, few people have taken the time to understand the healthcare expenses they may encounter. In a recent study, AARP found that less than 40 percent of people aged fifty to sixty-four have even tried to estimate how much money they’ll need for retirement health care.5 When asked how much they’ll need, 42 percent of pre-retirees said they would need less than $100,000 for out-of-pocket healthcare expenses during their retirement, 16 percent said it would cost them less than $50,000, and 15 percent said they didn’t know.6 A similar study from Fidelity confirmed AARP’s dire assessment, with nearly half (48 percent) of their study’s pre-retiree respondents estimating they will need about $50,000 to pay individual healthcare costs in retirement.7
• Medicare is de-facto means-tested. Another point of confusion about expenses may lie in determining the actual cost of Medicare. Individuals with a modified adjusted gross income (MAGI) of $85,000 or less and married couples with an MAGI of $170,000 or less pay the 2014 Part B standard premium of $104.90 a month and a Part D premium based on their plan. However, higher-income beneficiaries pay more for Medicare Part B and prescription drug coverage under Part D on a sliding scale based upon their prior-tax-year MAGI. For example, individuals making between $85,000 and $107,000 and couples making between $170,000 and $214,000 will pay an additional $42 a month for Part B and $12.10 a month for Part D. These “adjustment amounts” escalate up to additional monthly premiums of $230.80 and $69.30 for an individual with an MAGI above $214,000 or a couple with an MAGI above $428,000 (Figure One).8
• Long-term care is not covered. Long-term care is a significant and notable exclusion from Medicare coverage. According to Medicare & You, the official U.S. government Medicare handbook, at least 70 percent of people over age sixty-five will need long-term care services such as personal assistance at home, assisted living, and nursing home care and support at some point.9 In Section 9 titled “Plan Ahead for Long-Term Care,” unambiguously states (in bold) “Medicare and most health insurance plans, including Medicare supplement insurance policies, don’t pay for this type of care.”10 Medicare is intended to cover acute care. It pays for skilled care in a nursing home following a hospital stay; coverage for home care or intermittent skilled care is covered only for a limited time unless it is deemed medically necessary.11
Long-term care is the largest source of out-of-pocket expenditure risk for older Americans and represents a particularly thorny financial planning problem.12 Part of the challenge is the probabilistic aspect of the risk. While 70 percent of people over age sixty-five may experience some need for long-term care services, most episodes of long-term care last for one year or less. However, 12 percent of men and 22 percent of women experience stays of more than three years in a nursing home.13 Ten percent of people who enter a nursing home will stay there for five years or more.14 Given that nursing home costs upward of $75,000 or more per year — depending on geography — this expense can become substantial.15
We all look forward to retirement, a time to transition away from career work to something potentially more personally rewarding, enjoy a slower pace of life, and worry less. However, a successful retirement takes forethought and planning. You’ve got to understand and anticipate expenses and make sure you can adequately cover them (with a generous margin of safety). Given their magnitude, healthcare expenses, including insurance premiums, out-of-pocket expenses, and co-pays, must be a part of your analysis. Make sure that you understand the retirement healthcare insurance coverage available to you, what it covers, and what it costs to make sure your retirement plan is on solid ground.
1“Middle Class Americans’ Retirement Health Care Costs on Path to Exceed Social Security Benefits,” HealthView Services, April 17, 2014, http://apps.hvsfinancial.com/press/release1.pdf
3 “Fidelity Study Shows 84 Percent of Americans Concerned About Health Care Costs in Retirement,” Fidelity, March 18, 2014, http://www.fidelity.com/inside-fidelity/individual-investing/fidelity-study-shows-84-percent
4 Dana Anspach, “7 to-dos between 55 and 65 for a better retirement,” Market Watch, May 27 2014, http://www.marketwatch.com/story/7-to-dos-between-55-and-65-for-a-better-retirement-2014-05-27, page 2
5 Jean C. Setzfand, “Plan Now for Health Costs in Retirement,” AARP, November 21, 2013, http://www.aarp.org/work/retirement-planning/info-11-2013/plan-retirement-health-costs.html
7 “How to tame retiree health care costs,” Fidelity, June 11, 2014, https://www.fidelity.com/viewpoints/retirement/health-care-costs-when-you-retire
8 “Medicare Premiums: Rules For Higher-Income Beneficiaries,” The United States Social Security Administration, accessed May 20, 2014, http://www.ssa.gov/pubs/EN-05-10536.pdf
9 “Medicare & You 2014, “ Centers for Medicare and Medicaid Services, accessed May 20, 2014, http://www.medicare.gov/pubs/pdf/10050.pdf, p. 127
11 “Medicare,” Administration on Aging, accessed on May 20, 2014, http://longtermcare.gov/medicare-medicaid-more/medicare/
12 Jeffrey R. Brown, Gopi Shah Goda, and Kathleen McGarry, “Why Don’t Retirees Insure Against Long-Term Care Expenses? Evidence from Survey Responses,” July 2011, http://www.nber.org/programs/ag/rrc/NB11-05%20Brown,%20Goda,%20McGarry%20FINAL.pdf, p. 2
14 Christine Benz, “40 Must-Know Statistics About Long-Term Care,” Morningstar, August 9, 2012, http://news.morningstar.com/articlenet/article.aspx?id=564139
15 Jeffrey R. Brown, Gopi Shah Goda, and Kathleen McGarry, “Why Don’t Retirees Insure Against Long-Term Care Expenses? Evidence from Survey Responses,” July 2011, http://www.nber.org/programs/ag/rrc/NB11-05%20Brown,%20Goda,%20McGarry%20FINAL.pdf, p. 2