Assessing Healthcare Expenses in Retirement
July 9, 2013
by Dan McGrath, Paul Seidel and Josh Jackson, CAS, ALMI
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In the wake of the Affordable Care Act and its accompanying deluge of regulation, advisors are helping baby boomers prepare for retirement in more ways than ever before. But our industry continues to overlook a significant threat to clients’ continued comfortable lifestyles: out‐of‐pocket healthcare costs.
There is a distinct likelihood that many clients are completely unaware of these costs.
While nobody knows exactly what health-care costs will be in the future, these costs will undoubtedly escalate during retirement. The discussion surrounding retirement planning has mostly been about allocating assets, not about outliving one’s income, transferring wealth or paying future estate taxes. But the health-care costs outlined below are a very real threat.
Even if our projections are off substantially, this threat still needs to be addressed.
“But I’ll be fine. I have Social Security.”
For the roughly 78 million baby boomers heading to retirement (at the pace of roughly 10,000 each day), Social Security has never been a more integral part of financial planning. Social Security is one of the more important factors to consider when addressing health-care costs in retirement. Calculating benefit amounts and deciding the best time to file claims are quickly becoming hot‐button issues in the financial industry.
Depending on a person’s individual circumstances, it may be as simple as choosing one of two options:
- Take Social Security as soon as you qualify for and need it.
- Delay it as long as possible, because your health just may depend on it.
Can it really be this straightforward? The short answer is: It depends. Have you factored in how future health-care costs will affect your clients’ Social Security income (SSI) benefits?
An overview of the situation
For many middle‐income married couples, Social Security Income will comprise approximately 20% to 50% of their retirement income. But one of the most ignored expenses that will be deducted directly from this income is the cost of Medicare premiums. These premiums can easily wipe out any cost-of-living adjustments that retirees will need, and they could even wipe out a person’s total Social Security benefits. A significant number of retirees could never receive any Social Security income and also be taxed on the very same income they never see.
Simple financial planning techniques, along with several appropriate financial products available today, could help tens of millions of clients control skyrocketing health-care costs in retirement while providing income to maintain their financial freedom.
By understanding the relationship between Social Security and Medicare, advisors can make the transition into retirement a much easier one for their clients.
In no way are we attempting to educate the financial industry on the inner workings of either Social Security or Medicare. We assume the reader has a base level of knowledge of how Social Security and Medicare function. Instead, we are focusing on the sometimes-subtle interactions between the two programs.
How do Social Security and Medicare interact?
Did you know?
- Medicare Part B premiums must be deducted directlyfrom Social Security benefits, whereas Part D has several available payment alternatives. (see here)
- Medicare is mandatory in order to receive Social Security benefits for some individuals. Anyone 65 or older who is no longer covered under a credible health plan andwho is collecting Social Security must accept Medicare Part A, which is free. Anyone who is receiving SSI benefits before age 65 and who declines Medicare when eligible will have to pay back the entire amount received from SSI.
- Medicare Parts B and D have late penalties for delaying enrollment, and these penalties follow retirees for the rest of their lives. The Part B penalty is 10% for each 12-month period delayed. The Part D penalty is 1% for each month delayed. For example, consider a person who becomes eligible for Medicare at age 65 but decides to not enroll for 42 months. Upon enrolling, the person would have to pay a premium and receives a 30% penalty for delaying Part B coverage for three 12‐month periods. The Part D penalty would be an extra 42% for life. The client could have to pay these late enrollment penalties for as long as he or she has Medicare.