Lifetime retiree health care cost projections up 6.5%

Retiree health care costs continue to rise at a faster pace than general inflation and annual cost-of-living adjustments for Social Security benefits. As a result, retirees will spend increasingly larger portions of their retirement benefits to pay for health care costs over their lifetime.

A healthy couple retiring at 65 this year will likely spend more than $266,000 on Medicare Part B, which covers doctors’ visits and outpatient services, and Part D prescription drug plans as well as supplemental Medigap insurance over their lifetime, according to the 2015 Retirement Health Care Cost Data Report. That is up 6.5% from last year’s projection, according to the report compiled HealthView Services, a provider of Medicare, Social Security and long-term care planning tools for advisers.

When expected dental, vision, hearing costs not covered by Medicare, as well as co-pays and other out-of-pocket medical costs are included, lifetime cost estimates increase to nearly $395,000 for a 65-year-old couple retiring this year.

For a 55-year-old couple retiring 10 years from now, their expected lifetime costs for Medicare and Medigap are projected at nearly $321,000. When dental, vision and hearing costs as well as co-pays and other out-of-pocket costs are included, their projected lifetime costs rise to more than $463,800.

“The report demonstrates that health care costs will account for a very significant and growing portion of retirees’ budgets,” said Ron Mastrogiovanni, founder and chief executive of HealthView Services.
“The data also shows that Medicare-related costs are only part of the story,” he said. “Retirees need to plan for health-related expenses not covered by Medicare and the potential impact of income-based Medicare surcharges.”

The average cost estimates assume that a couple’s retirement income falls below the $170,000 Modified Adjusted Gross Income threshold for married couples ($85,000 for single individuals) when surcharges are added. Retirees whose income exceeds this amount will face Medicare surcharges between 35% and 200%, further increasing their retirement health care cost burden.

Since 2007, Medicare Part B premiums and all Medicare surcharges have been deducted directly from gross Social Security income, so many beneficiaries are likely to receive smaller monthly checks than they anticipate.

HealthView Services’ Retirement Health Cost Index projects that total health care costs will consume 67% of lifetime Social Security benefits for a 66-year-old couple retiring at their full retirement age this year. For a similar couple retiring 10 years from now, health care expenses will eat up about 90% of their Social Security benefits. The index is based on a couple’s average Social Security benefits of $25,332 in 2015 and assumes annual cost of living adjustments of 2%.

“These numbers are big, but they are manageable if planned for early enough,” Mr. Mastrogiovanni said. “Medicare surcharges can often be reduced by investing in products that do not increase a retiree’s Modified Adjusted Gross Income” such as Roth IRAs, health savings accounts, non-qualified annuities, cash-value life insurance and reverse mortgages.

“The starting point for managing these costs is sitting down with an adviser to calculate expected health care costs and incorporating them into a comprehensive retirement plan,” he added.