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Scary Retirement Study: Health Care Will Eat Up Social Security Benefits

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In the popular imagination, Social Security supplements the income of the elderly and Medicare pays their health insurance.

But a comprehensive new report on retirement health care warns that the expected increase in health care expenses for seniors will nearly swallow the average Social Security benefits Americans often depend on for retirement income.

Indeed, the 2015 Retirement Health Care Cost Data Report, released Wednesday by HealthView Services, is warning that a couple aged 66 today—and thus eligible for full retirement benefits—can expect health care costs to eat up 67% of their lifetime Social Security benefits.

And that projection assumes the couple has optimized their Social Security benefits, and is exclusive of long-term care.

The implication is that middle-class Americans without significant supplemental retirement savings might be facing tough choices between fulfilling their retirement dreams and paying their all-too-real health-care expenses.

The problem is expected to be all the more acute for younger Americans because of a projected health care inflation rate of approximately 6.5%.

Thus, a couple retiring in 10 years at the age of 65 can expect health care expenses to subsume about 90% of their lifetime Social Security benefits.

Only those unfortunate enough to face serious illness will catch a financial break, since their shorter life expectancy is projected to significantly trim their lifetime health care costs.

Thus, the lifetime health care tab for a healthy 55-year-old male can be expected to reach $223,000 based on his life expectancy of 86, yet his Type II diabetic counterpart’s life expectancy of 76 translates to a lifetime health care costs of $118,000.

In calculating health care costs, the HealthView Services report generally includes Medicare Part B and D and supplemental insurance. The advisor-oriented provider of retirement health care data and planning tools estimates those costs to add up to $266,589 on average for a 65-year-old couple retiring today and at $320,996 for a couple retiring at age 65 10 years from now.

But adding in more variable health expenses such as dental, vision, hearing, co-pays and other out-of-pocket expenses would increase lifetime health-care expenses to $394,954 for a 65-year-old couple retiring today and $463,849 for a couple retiring at age 65 10 years from now.

The financial advisor’s role in all this is crucial, says HealthView Services founder and CEO Ron Mastrogiovanni, in a release announcing the new report.

“These numbers are big, but they are manageable if planned for early enough.… The starting point for managing these costs is sitting down with an advisor to calculate expected health care costs and incorporating them into a comprehensive retirement plan.”

Thus, advisors who want their clients’ Social Security to fund non-health care costs, as it was meant to do, should be encouraging a 55-year-old average couple planning to retire in 10 years to stash a whopping $1,206 a month if the couple’s goal is to have enough to pay for Medicare part D costs and costly supplemental insurance as well.

That number falls to just $429 monthly if the goal is merely to cover Medicare part D.

Advisors to wealthy clients must factor in the steep costs of Medicare surcharges, which kick in for couples whose income exceeds $170,000, and increase premiums anywhere from 35% to 200%.

The report details widely varying components of health care costs, some of them shocking. For example, pre-retiree deductibiles have increased by 50%, to an average of $1,217 annually, since 2009, though the rate of cost-sharing has increased in the 3% annual range for retirees.

In general, the recession has muted health care inflation in recent years, though retiree health care expenses are expected to rise significantly in the coming years. HealthView Services reckons average annual health care expenses for retirees at $11,268 for the balance of the decade—a figure expected to rise (in inflation-adjusted dollars) to over $31,000 annually 20 years hence.

Another material finding is the influence of location on retiree health care. A 65-year-old retiree couple in Maryland, for example, is projected to pay 73% more in supplemental insurance than their counterparts in Hawaii, suggesting perhaps that financially strapped retirees need not entirely abandon their travel dreams if they shop around for attractive yet affordable retirement venues.

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