Financial advisors won’t know until October how much more their clients will collect in Social Security payments next year but no matter what the increase it probably won’t be enough to offset rising health care costs.
Those costs are increasing at more than twice the rate of the Social Security COLA, according to HealthView Services, a software provider of health care cost projections.
Its latest Retirement Health Care Costs Data Report projects that health care costs will rise 5.5% annually during the next decade, more than double the projected annual Social Security COLA of 2.6%. In reality actual COLAs have been even lower, under 2% in four of the five years from 2012 to 2016.
The report is based on projections for increases in health care premiums for Medicare Part B, which covers non-hospital costs, including physicians; Medicare Part D (prescription costs): supplemental insurance; and dental. It does not includes long-term care expenses.
In 2016, when there was no Social Security COLA, Medicare Part B premiums grew 16% and in 2017 they rose 10%. The Medicare Board of Trustees estimate these premiums will decline 1.3% in 2018 but they projected a 24% decrease for 2017 when they rose 10%.
Part D premiums are expected to grow 8% annually “for the foreseeable future,” and to account for an increasingly larger share of Medicare-related expenditures (from 16% this year to 27% in 2027), according to the HealthView Services report. And supplemental insurance is expected to rise at a rate of 7.12% annually, due to rising inflation rates and annual age-based increases.
Low single-digit increases in Social Security checks can’t keep up.
Of course, how much is spent on health care costs depends in large part on how long someone lives. Under current actuarial data, a healthy 65-year-old male is expected to live to age 87 and his female counterpart is expected to live two years longer.
A 65-year-old couple whose members live as long as their projected life expectancies will pay $404,253 for total health care costs in today’s dollars and $607,662 in future dollars, according to HealthView Services. If they each live two years longer than expected, the total additional costs will be about $49,000 in today’s dollars and more than $101,000 in future dollars.
Given these projections for health care costs, longevity and Social Security COLAs, HealthView Services concludes that the standard income replacement ratios (IRRs) that financial advisors use when developing clients’ financial plans will likely not be enough.
Most IRR plans assume an annual inflation rate of 2.5% to 3%, which is far short of the 5.47% health care inflation rate, and they assume that clients will pay only 25% of their health care premiums like they do during their working life, according to the report.
Moreover the typical IRR assumes that a retiree needs to replace 75% to 85% of their working income while a number closer to 90% may be more realistic. That’s because they need to cover not only rising inflation rates and a larger share of health care premiums but also co-pays, vision and dental care coverage and any other costs Medicare plans doesn’t cover, according to Ron Mastrogiovanni Sr., president and CEO of HealthView Services.
The report recommends that individuals modify their behaviors to stay healthy and address any health issue and that they discuss their “individual choices related to health and savings,” presumably with family and their advisors.
Advisors should take that initiative if their clients don’t. They need to know the state of a client’s health not only to determine potential health costs but also life expectancy, which will affect all retirement costs, says Mastrogiovanni.
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