If you and your spouse turned 65 years old this year, I've got bad news. According to Healthview Services, you're going to spend $404,000 on healthcare over your remaining years, and that spending is going to eat up an increasingly larger share of your Social Security income.
Runaway costs
Healthview Services' study finds that healthcare costs will increase by 5.47% annually for "the foreseeable future." If they're right, the cost of healthcare will increase three times faster than the U.S. inflation rate since 2012, and more than twice as fast as future Social Security annual cost-of-living increases.
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Unfortunately, rising healthcare costs will have a big impact on Medicare Part B and Medicare Part D premiums. Medicare Part B covers 80% of healthcare services, such as doctors visits, while Medicare Part D is a separate prescription drug plan. In addition to premiums, Medicare Part D members pay out-of-pocket costs, such as deductibles and co-pays.
Between 2018 and 2025, Healthview Services estimates that Medicare Part B premiums will grow 3.57% per year. Part D premiums are expected to increase by 8% per year. Premiums for supplemental insurance, or Medigap plans, which pay a Medicare recipient's out-of-pocket costs, will increase 7.12% per year, too. Those increases will handily outpace the expected 2.6% annual growth in the consumer price index used to calculate annual Social Security cost-of-living increases.
Overall, the healthcare expense burden on retirees will be heavy.
Healthview Services forecasts that the average 65-year-old couple will spend $404,253 over their lifetime on healthcare, or more than half of their lifetime Social Security benefits. Even more discouraging, that figure doesn't include long-term care costs. Long-term care isn't covered by Medicare, so it can add tens of thousands of dollars per year to a couple's lifetime healthcare expenses.
The crisis is even more dire for younger couples.
A 55-year-old couple can expect to pay $498,962 in lifetime healthcare costs after they reach 65 years old, and a 45-year-old couple will pay $635,142 in lifetime healthcare costs after they reach 65 years old. As a result, a 55-year-old couple can expect to spend 92% of their lifetime Social Security benefits on healthcare and a 45-year-old couple can expect to spend 122% of their lifetime Social Security income on healthcare.
Social Security: Falling short
Instead of tying annual Social Security increases to healthcare inflation, Social Security increases are calculated using CPI-W, a broad inflation measure for U.S. workers. Historically, CPI-W has trailed healthcare inflation rates significantly. For instance, Social Security income didn't increase at all in 2016, and in 2017, it only increased by 0.3%. Meanwhile, in 2017, rising healthcare costs resulted in Medicare Part B premiums and Medicare Part D premiums increasing by 10% and 8%, respectively.
A hold-harmless provision that only allows Medicare Part B premiums for current Social Security recipients to increase by the same rate as Social Security benefits helped keep Part B premium increases in check for some retirees this year. However, this provision only applies to people currently receiving Social Security that are also paying their Part B premiums directly out of their Social Security checks. Hold-harmless doesn't apply to out-of-pocket costs, Part D premiums, or people who are subject to Medicare income adjustments.
Social Security also faces a potential across-the-board cut in benefits as soon as 2034, and that could compound the crisis. Because baby boomers are retiring, there are fewer workers paying payroll taxes, which are used to pay Social Security benefits to current recipients. As a result, Social Security is paying out more money than it's taking in from taxes. For now, Social Security is making up the difference by tapping its trust fund, but that fund is expected to run dry in 2034, and without changes to Social Security, recipients will face an across-the-board 25% cut in their benefits at that point.
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A financially secure retirement
Would-be retirees that hope to maintain financial security throughout retirement are going to need to consider strategies now that can boost retirement income.
While its tempting to put off saving for retirement because of other spending priorities, delaying can significantly reduce how much you can safely withdraw from accounts in retirement. A person in their mid-30s that saves $1,000 per month can have a retirement account valued at $948,698 at age 65, if they earn 6% returns annually. Wait until 45 to start investing $1,000 per month, and your total at age 65 drops to $441,427.
If you're fast approaching retirement, taking advantage of catch-up contributions allowed to IRA and employer-sponsored accounts, including 401(k) plans, is wise. In 2017, people who qualify to contribute to an IRA can invest an additional $1,000, or a total of $6,500, if they're age 50 or older. In employer-sponsored plans, people age 50 and up can contribute an additional $6,000, or a total of $24,000 this year.
If you're already in your 60s, you might want to consider delaying Social Security benefits until age 70. If your full retirement age is 66, waiting to claim until 70 can result in a payout that's 32% bigger than it would be at age 66. Plus, if your income is comparatively higher than it's been in the past, working additional years can increase the amount you qualify for in Social Security benefits because Social Security income only uses your highest 35 years of income in its calculation.
On the costs side of the ledger, buying a Medigap plan can keep annual out-of-pocket spending on healthcare expenses capped, and buying long-term care insurance can help protect your retirement savings if a stay in assisted living or a nursing home is necessary. Overall, preparation is the best way to keep healthcare expenses from busting your budget in retirement.
