I know I must sound like a broken record (or an iPod in permanent shuffle mode), but delaying retirement by even a few years can have a big impact on a client's retirement income plan, thanks to higher Social Security benefits and by allowing their savings to continue to grow untapped.
But here's another reason to defer a retirement date by a few years: lower out-of-pocket health care costs.
Couples retiring at age 65 are expected to incur $220,000 in health care costs on average during their retirement years, according to the 2014 Retiree Health Care Cost Estimate released Thursday by Fidelity Investments. The estimate, which is unchanged from 2013, does not include the added expenses of nursing home or long-term care.
But couples who decide to retire at 62 — before they are eligible for Medicare —are likely to spend an extra $17,000 per year for a total of $271,000 during retirement, the Fidelity survey found. The extra costs include health insurance premiums for the period prior to Medicare eligibility and estimated out-of-pocket costs.
On the other hand, couples who can postpone retirement just a few years to age 67 could save about $10,000 per year, reducing their estimated costs for health care in retirement to $200,000.
“Rising health care expenses are forcing people to make educated decisions now more than ever, ranging from the services they utilize to the age at which they choose to retire,” Brad Kimler, executive vice president of Fidelity's Benefits Consulting business, said in a statement accompanying the survey results.
“It's critical that people plan well in advance for the considerable cost of health care by adding it into their overall retirement planning discussions,” Mr. Kimler said.
After increasing an average of 6% a year for nearly a decade, Fidelity's retiree health care cost estimate has declined gradually from its peak of $250,000 in 2010 to $220,000 today. Among the drivers: lower-than-expected Medicare spending, continued long-term savings on prescription drugs because of the gradual closure of Medicare Part D's “donut hole” and an increasingly cautious and selective health care consumer.
Smaller payment increases to hospitals, physicians and health plans, along with demographic changes, have also contributed to the drop in retiree health care costs since 2010, Fidelity noted. As baby boomers retire, they bring a larger influx of younger enrollees into the Medicare population, reducing the overall average age of participants. In general, younger retirees tend to have lower health care expenses than older retirees.
But that demographic pattern foreshadows higher Medicare costs in the future. While the current trend of lower spending per enrollee has had a positive impact on Medicare costs, the growth in Medicare enrollment over the next few years is expected to continue to strain Medicare-related resources.
In an effort to help both companies and employees reduce health care expenses, many employers are offering high-deductible health insurance plans and combining them with health saving accounts. Similar to the way in which 401(k) plans provide tax-advantaged savings for retirement, HSAs offer tax-advantaged opportunities for qualified medical expenses, both today and in the future.
HSAs allow pre-tax dollars that are not spent on health care to carry over from year to year. HSA distributions used to pay for health-care expenses are tax-free.
HSAs are also one of the few sources of tax-free income in retirement that are not included in the modified adjusted gross income calculation used to determine Medicare premiums each year. (The other two sources are Roth IRA distributions, and loans or distributions from cash-value life insurance).
Although most beneficiaries pay $104.90 per month for Medicare Part B, which covers doctor visits and outpatient services, individuals whose MAGI exceeds $85,000 per year or married couples whose MAGI exceeds $170,000 per year pay higher monthly premiums. They also pay higher monthly premiums for Medicare Part D, which pays for prescription drugs. The four-tiered income brackets are not indexed for inflation, meaning each year, more retirees will pay more for their health care coverage.
(Questions about Social Security? Find the answers in my new ebook available at www.investmentnews.com/MBFebook for $19.95.)