While most expenses can be expected to drop during retirement, medical expenses usually rise quite a bit. As we age, we inevitably rack up health conditions that require treatment and prescriptions to keep them under control. Naturally, those drugs and treatments don't come free.
The cost of Medicare
Medicare doesn't come free, either. It's true that Medicare Part A doesn't require premiums, but Part A only covers hospital-related expenses. Medicare Part B, the second half of "original Medicare," does charge premiums -- and Medicare Part C (aka Medicare Advantage) and Part D (prescription drug coverage), while technically optional, are almost a requirement to protect retirees from excessive out-of-pocket costs. In fact, Healthview Services' 2017 Retirement Healthcare Costs study found that a 65-year-old couple retiring today can expect to pay an average of over $320,000 in Medicare premiums over the course of their retirement.
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Healthcare costs and Social Security benefits
The monthly Social Security benefit check makes up a significant percentage of most retirees' income. Unfortunately, the bulk of that check ends up paying for healthcare expenses. According to the study, that average 65-year-old couple retiring today will spend just over $404,000 on healthcare (that figure includes the aforementioned Medicare premiums). That means 59% of this average couple's Social Security benefits will go to pay for medical expenses.
Projected healthcare costs
Premium costs for the various Medicare plans and other healthcare expenses have been going up significantly faster than COLA (cost-of-living adjustments) raises to Social Security benefits. For example, Medicare Part B premiums increased by 10% and Part D premiums by 8% between 2016 and 2017; the Social Security COLA for 2017 was just 0.3%. As a result of this ongoing discrepancy, the Healthview study projects that an average couple retiring in 10 years will spend the equivalent of 92% of their Social Security benefits on healthcare expenses, and an average couple retiring 20 years from now will spend 122% of their Social Security benefits on healthcare. If these projections are correct, future retirees are going to be dedicating absurd percentages of their income just to get the medical care they need.
Cutting your healthcare expenses
Now that you're thoroughly depressed about your future, it's time to consider some good news. It's possible to cut your healthcare expenses to a level that you can easily manage on a retiree's income.
The single biggest way to cut healthcare costs and generally increase your quality of life is to stay healthy. Of course, that's not entirely within your control, but there are steps you can take that have been proven to increase long-term health in seniors.
The Healthview study report included a case study of a 50-year-old diabetic man and looked at how his diligence in following basic lifestyle recommendations (exercise, maintain a healthy weight, stop smoking, follow a diabetic diet, etc.) affected his projected lifespan and medical expenses. The case study found that by following the recommendations, this 50-year-old diabetic would add an average of eight years to his lifespan and would save over $5,000 per year between the ages of 50 and 64 -- giving him substantially more money to spend in retirement.
The report estimated that that extra $5,000 per year, if invested at a 6% rate of return, would give him an additional $17,000 of income per year during retirement.
Self-insuring
The other major option for coping with high healthcare costs is to increase your available retirement income to compensate for these expenses. The surest and easiest way to manage this is to save more money before you reach retirement.
The earlier you start, the more effective your extra savings will be; but even if you're approaching retirement, you're not too late to make a substantial difference in how much you can have in your retirement savings accounts.
Remember, that hypothetical 50-year-old diabetic who saved an extra $5,000 per year reaped over three times that in additional retirement income. If you're in your 50s or even 60s and are behind on saving for retirement, now is the time to max out your retirement contributions. You might also consider delaying retirement by a few years to give your savings extra time to grow and produce returns. Waiting until age 70 to retire might not be ideal, but if doing so guarantees you a well-funded retirement, the sacrifice of an extra few years of work is worth it.
