On Retirement

Why healthy clients need to save more for retirement

Tax-free health savings accounts, Roth IRAs, insurance and annuities can help cover retirees' future health-care costs

Jul 8, 2019 @ 10:43 am

By Mary Beth Franklin

Here's a counterintuitive thought: Healthy clients are likely to have higher medical costs in retirement than their less-healthy counterparts. Why? Because they are likely to live longer than average, and health-care costs tend to increase at the end of life.

A newly released white paper from HealthView Services, Why Health Needs to Be Part of Retirement Planning, provides new data detailing the projected cost of health care, the impact of health conditions and strategies to plan for, manage and even reduce health-care costs in retirement.

HealthView Services, which provides health-care cost data for the financial services industry, bases its retirement health-care projections on 530 million health-care cases, as well as actuarial, government and economic data.

The report shows actuarially projected total lifetime health-care costs for an average healthy 65-year-old couple retiring in 2019 will be $387,644 in today's dollars. Total lifetime costs include premiums for Medicare Part B outpatient coverage and Part D prescription drug coverage, dental and supplemental Medigap insurance, as well as all out-of-pocket outlays for medical, dental, hearing and vision. Average life expectancy is 87 for men and 89 for women.

The paper notes that costs will be significantly higher at the end of retirement than at the beginning. In 20 years, the couple can expect to be paying $34,268 in future dollars for one year of health-related expenses, excluding long-term care, compared to $12,286 during their first year of retirement today.

Today's 40- and 50-year-olds face even higher health-related expenses in retirement, driven by projected health-care inflation of 4.41% per year.

New retirees, who generally paid about 25% of their medical premiums during their working years, are often surprised by the cost of health care in retirement, when they become responsible for 100% of their premiums and expenses.

For example, a 64-year-old working couple covered by an employer-sponsored HMO plan this year would pay $3,742 to cover their 25% share of health-care costs. But a year later, their health-care costs would nearly double, to $7,145, because they are responsible for all their retiree health premiums.

The report shows projected annual health-care costs for healthy Americans will, on average, be lower than those for people in poorer health. But because healthy people are expected to live longer, their lifetime health costs will be higher.

For example, a healthy 55-year-old woman living to her life expectancy of 89 will need to plan to spend $424,875 in future dollars on lifetime health-care costs. But if the 55-year-old woman has Type 2 diabetes, her actuarial longevity will be 80 and her projected total costs would be far lower, at $266,163.

The paper details how simple behavioral changes, including taking medication as prescribed and reducing salt intake, would enable a 45-year-old man with high blood pressure to lower his annual pre-retirement health costs by an average of $3,651.

If he invested those savings, assuming a 6% rate of return, he would be able to increase his retirement assets by more than $110,000 by age 65 while extending his expected longevity by more than two years.

Health-related investment choices also can make future costs more manageable. Selecting financial products that help reduce Medicare surcharges in retirement and taking advantage of strategies, including health savings accounts for those with high-deductible health insurance plans, can create opportunities to maximize retirement income.

HSAs offer triple tax benefits: Contributions are pretax, gains aren't taxed, and withdrawals do not count toward taxable income if they are used to pay health-related expenses, including Medicare premiums. Distributions from Roth 401(k) plans and Roth IRAs, as well as distributions from cash-value life insurance and a portion of nonqualified annuity payouts, don't count in the calculation that determines Medicare high-income surcharges. Currently, single individuals with income over $85,000 and married couples with joint income over $170,000 pay higher monthly premiums for both Medicare Parts B and D.

For example, a 50-year-old man who has not saved for health care would need to put aside $7,129 a year before retirement at age 65 to cover his future Medicare Parts B and D and supplemental insurance premiums. Or he could contribute an additional $183 every two weeks to his 401(k), assuming a 6% return with a 50% company match, to cover these future premiums.

Others many prefer a one-time lump-sum investment to fund future expenses. The 50-year-old man in the above example could invest $80,050 today to cover future health premiums, assuming a 6% annual return. That estimate does not include Medicare Part B premiums, which would be deducted directly from his Social Security benefits.

"Health care must be incorporated into the retirement planning process and not simply because it is a significant expense that all Americans will face," said Ron Mastrogiovanni, CEO of HealthView Services. "Costs must be understood and managed within the context of existing savings, health conditions, Social Security benefits, investment choices and other retirement factors so working Americans can generate enough income to cover future health care needs."

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