Retirement Healthcare Costs Are Rising Twice as Fast as Social Security

For years, older workers have been warned to prepare for rising healthcare costs in retirement. But the latest projections on medical care paint a pretty bleak picture for seniors who plan to get the majority of their retirement income from Social Security.

In a new report from HealthView Services, a provider of cost projection software, healthcare costs in retirement are rising twice as fast as the typical annual increase in Social Security benefits -- so much so that over time, retiree healthcare costs are likely to exceed what they collect in Social Security. The latest estimates indicate that total out-of-pocket spending for the average 65-year-old couple retiring today could surpass the $400,000 mark when you factor in Medicare premiums, supplemental insurance premiums, deductibles, and copays. And that's just what an average couple might pay; those with known health issues might wind up on the hook for even more.

IMAGE SOURCE: GETTY IMAGES.

But the problem isn't just rising healthcare costs; it's the fact that most seniors are entering retirement without enough savings. The Economic Policy Institute reports that 41% of baby boomers aged 55-64 have no retirement savings at all, while the median savings amount for households nearing retirement is a mere $17,000 -- hardly enough to even make a dent in that $400,000-plus figure. And while those without adequate savings might be banking on Social Security to pick up the slack, given that medical costs are rising much faster than benefits, a frightening number of seniors might be in for a serious shock.

Social Security simply can't keep up

Healthcare costs aside, Social Security has already been criticized for failing to keep pace with rising senior living expenses. But the latest estimates from HealthView paint an even more dire picture for the countless seniors who depend on Social Security in the absence of additional income streams. According to the Social Security Administration, 61% of retirees rely on their monthly benefits to provide at least half of their income. For retirees who aren't married, this number climbs to 71%.  

Yet Social Security's meager cost-of-living adjustments are causing seniors to lose buying power across the board, and this includes healthcare. Last year, beneficiaries saw just a 0.3% increase, which, for many, was instantly swallowed up by an increase in Medicare Part B premiums. Meanwhile, according to the Social Security Trustees' Report, seniors should only expect a 2.6% average annual increase going forward. Now that might seem like a big jump from the measly 0.3% seniors just saw, but given that healthcare is expected to rise at a rate of 5.47% annually, beneficiaries without an additional means of income are eventually going to start falling behind.

Case in point: According to HealthView, a 66-year-old couple retiring this year will need 59% of its Social Security benefits to cover medical care throughout retirement. But based on projected inflation rates, a 55-year-old couple today retiring at age 66 will need 92% of those benefits to pay for healthcare expenses. Worse yet, a 45-year-old couple today retiring at 66 won't come close to covering its medical costs via Social Security, all other things being equal.

Clearly, none of this constitutes good news, but there is a silver lining here: If you work on increasing your retirement plan contributions, you can compensate for those daunting healthcare costs that seem to be going nowhere but up. And the sooner you begin ramping up your savings, the better your chances of avoiding the struggles that so many of today's seniors inevitably face.

More savings can help

Though current workers are allowed to contribute up to $18,000 a year to a 401(k) and $5,500 a year to an IRA ($24,000 and $6,500, respectively, for those 50 and older), most savers don't get close to hitting these limits. But even if you can't max out these thresholds, socking away just a bit more than what you're currently contributing can ultimately spell the difference between affording healthcare in retirement and struggling to pay your bills.

The following table shows the extent to which you'll increase your nest egg based on various increases in monthly savings:

TABLE AND CALCULATIONS BY AUTHOR. *ASSUMES AN AVERAGE ANNUAL 7% RETURN AND 30-YEAR SAVINGS WINDOW.

As you can see, contributing just $50 more per month on a consistent basis will leave you with an extra $56,000 in retirement -- and that's an amount you can eke out by skipping a few store-bought morning coffees each month and forgoing just one or two cab rides. Better yet, if you ramp up your savings so that you're contributing an additional $400 per month, you'll wind up with enough money to make a serious dent in your lifetime healthcare costs, which means you'll have the option to spend your Social Security checks elsewhere.

Given the rate at which healthcare costs are rising, you really have no choice but to face the problem head-on. Social Security won't provide enough income to cover the amount you'll ultimately need to spend on medical care, and the sooner you embrace that reality, the better positioned you'll be to start saving appropriately.