On Retirement

Good health is key to retirement security

Incorporating health-care costs into retirement plans can boost an adviser's value

Aug 8, 2017 @ 12:59 pm

By Mary Beth Franklin

The key to retirement security has traditionally focused on money. But lately, the discussion has embraced health as an increasingly important component in the retirement security equation.

In fact, health status during working years and health-care costs in retirement were among the leading topics of discussion during the recent Retirement Research Consortium in Washington. The annual event is like Comicon for retirement research nerds, minus the superhero costumes.

The heightened awareness of the impact of health status on both retirement planning and retirement itself was also highlighted in a recent Aegon Retirement Readiness report, Successful Retirement—Healthy Aging and Financial Security.

"The ability of American workers to achieve their retirement aspirations lies beyond accumulating sufficient retirement savings," the report found. "The ability to sustain health throughout people's lengthening working lives as well as their lengthening retirement lives is set to become one of the biggest issues relating to retirement in our times."

Nearly 90% of the 1,000 participants in the Aegon study, which included both workers and retirees, reported they were in good or excellent health. Those in excellent health were more aware of the need to plan financially for retirement, more likely to be saving habitually and more likely to be confident that they would be able to achieve a comfortable retirement than those who said they were in fair health, the report said.

That shouldn't be a surprise. Healthy people are wise to prepare for an active — and lengthy — retirement. People in poor health may be less concerned about longevity, but could face larger-than-average health-care costs.

Financial advisers should pay attention to the shifting discussion.

"With 74 million people heading towards retirement and with recent surveys highlighting the fact that many of these people are trying to plan accordingly for these costs, the opportunity for the financial industry to grow has never been more prevalent," attests a new white paper from Jester Financial, a software company that provides health-care cost estimates to financial services firms.

The paper suggests strategies for both younger investors and those nearing or in retirement to minimize the impact of taxes on their retirement savings to prevent higher Medicare premiums and lower net Social Security benefits. Younger investors should consider using health savings accounts and Roth IRAs. Older investors might consider Roth IRA conversions and purchasing cash-value life insurance to shift a portion of their assets to tax-free vehicles that could supplement retirement income.

"The overall impact of saving too much money incorrectly can lead to increased mandatory health-care costs in retirement," the Jester Financial paper said.

A similar argument was made in the third annual Retirement Health Care Data Report released by a competing firm, HealthView Services, in June. That report projected total lifetime out-of-pocket health-care costs for an average 65-year-old couple retiring this year would top $400,000.

In most cases, Medicare premiums are deducted directly from Social Security benefits, and rising premiums can take a growing chunk out of those monthly retirement benefits. Most retirees are protected from a net decline in Social Security benefits from year to year by a "hold harmless" provision that prohibits the increase in Medicare premiums from exceeding the annual increase in Social Security benefits.

But not all Medicare enrollees are protected from outsized increases in Medicare premiums, including high-income retirees and people who are enrolled in Medicare but not yet collecting Social Security benefits. Those who are not protected by the "hold harmless" provision shoulder the burden of any annual Medicare premium hikes.

After several years of virtually no inflation — and a paltry 0.3% cost-of-living adjustment in 2017 — Social Security benefits are expected to increase by at least 2% next year. That would boost the average monthly retirement benefit of $1,360 by about $27, and means the "hold harmless" provision won't be a major issue in 2018. For most retirees, monthly Social Security benefits in 2018 will increase enough to cover any Medicare premium hike — but not much else. Medicare premiums for 2018 will be announced this fall.

High-income seniors, defined as individuals with modified adjusted gross income (including tax-free interest) above $85,000 a year and married couples with annual incomes that top $170,000, pay higher monthly premiums for Medicare, known as an income-related monthly adjustment amount, or IRMAA. Medicare surcharges for 2018 are based on 2016 tax returns.

In the long term, many retirees may find their buying power reduced as they spend increasingly larger portions of their Social Security benefits on Medicare premiums.

"Many retirees who will rely on Social Security benefits as a major source of income may in fact experience little to no growth year over year in terms of their Social Security benefits, even with Medicare's hold harmless act," the Jester Financial paper said. "While those who enter into Medicare's IRMAA brackets may see an actual reduction in their Social Security benefits."

(Questions about Social Security? Find the answers in my new ebook, available here.)


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