A couple retiring next year at age 65 can expect to spend about 70% of their lifetime Social Security benefits on healthcare costs alone, according to a new study.
These findings come despite the recent good news that older adults will get an 8.7% increase to their Social Security benefits for next year and see their monthly Medicare Part B premiums decrease by $5.20. That combination of a big boost to benefits plus lower premiums is very rare and won’t likely repeat itself any time soon, experts say.
Instead, the long-term pattern of healthcare inflation outpacing Social Security raises will resume, causing medical expenses to gobble an increasing portion of retirees’ benefit checks over time, according to a report from HealthView Services, a firm that provides retirement healthcare cost data and tools to financial advisors. Medicare Part B premiums, which are just one component of healthcare costs, will rise by about 5.9% a year through 2031, according to HealthView Services’ estimates based on government data; meanwhile, the Social Security Administration forecasts a 2.4% cost-of-living adjustment each year from 2024 through 2031.
Pre-retirees neglect healthcare planning at their peril, said Ron Mastrogiovanni, CEO of HealthView Services. “It’s so large that ignoring it can have a significant impact on your lifestyle,” he said.
Knowledge is an important start. Many younger people mistakenly believe that Medicare is free, Mastrogiovani said, and they envision their healthcare costs dropping to zero once they become eligible at age 65. Medicare provides good coverage, but it’s not free: beneficiaries pay monthly premiums for Part B, which are deducted from their Social Security checks. Many also pay separate premiums for Part D drug coverage and Medigap supplement coverage.
In addition to premiums, Medicare requires cost-sharing in the form of deductibles, copayments, and coinsurance. What’s more, original Medicare doesn’t cover big-ticket items like dental care and hearing aids. (Private Medicare Advantage plans often provide some coverage of these expenses.)
In the first three years of retirement, a healthy couple can expect to spend about 45% to 48% of their Social Security income, before taxes, on healthcare costs, according to HealthView Services. After 10 years, that number will rise to 64%, and at the end of life—the report assumes the couple dies at age 89—nearly all of their of their Social Security income goes to medical costs: they will receive a projected $56,066 in benefits, versus $55,555 in medical expenditures. That steep outlay comes from the combination of higher compounded medical costs and higher healthcare utilization in old age.
The calculations assume that each spouse files for Social Security at age 65. They are healthy for their age and don’t have serious issues like diabetes. The calculations exclude long-term care costs like home health aides and the Medicare income-related monthly adjustment amount (IRMAA) that higher-income beneficiaries pay.
A health savings account (HSA) is a good way to prepare for healthcare costs in retirement. You can open one only if you are enrolled in a qualifying high-deductible health insurance plan. If you can afford to, Mastrogiovanni advises that you invest your HSA funds, as opposed to leaving them in cash, and not touch them to pay medical bills while you’re still working.
Instead, pay medical bills from your cash flow and let your HSA funds grow tax-free in the market. They can be withdrawn tax-free in retirement to pay qualifying medical expenses, a category that includes everything from Medicare premiums to dental procedures, durable medical equipment, and acupuncture.
Write to Elizabeth O’Brien at [email protected]