Social Security is a vital income stream for most retirees. According to the Social Security Administration, 53 percent of married couples and 74 percent of unmarried individuals receive half or more of their income from the program.
What many of these retirees don’t prepare for, however, is the impact of rising health care costs on their benefits. The average 65-year-old couple will pay well over a quarter of a million dollars in Medicare premiums over the course of retirement, and out-of-pocket expenses bring their total health care costs to nearly $400,000.
That’s roughly the same amount the average worker will receive in lifetime inflation-adjusted Social Security benefits. Even with an optimistic projection for a couple who earned equally throughout their lives, health care will consume roughly half of their benefits. Realistically, that figure is closer to 70 percent, and could climb as high as 90 in the next 10 years, according to a HealthView Services report.
While there’s not much to be done about the costs of care – Medicare premiums in particular – clients can use specific strategies to mitigate the effects of those costs on their Social Security income. For middle class and more affluent clients alike, these strategies can help them protect assets, preserve legacies and avoid Medicaid.
Rising costs, lower collection ages
For most retirees, Medicare premiums are the biggest part of the health care pie. The typical 2017 premium is $134 per month, with increased rates for higher earners. Part D prescription coverage rates average between $30 and $40 per month, and supplemental insurance costs an average of $183. Out-of-pocket costs include deductibles, copays and, perhaps most importantly, dental and vision, which aren’t covered by Medigap. Like Social Security itself, inflation will drive these rates up over time.
Despite rising health care costs, most retirees are still collecting Social Security early – and thereby penalizing themselves by up to 25 percent. While only 3 in 10 pre-retirees plan to draw early, the majority of Americans collect before full retirement age – nearly half at age 62. For men, the average collection age actually dropped between 2014 and 2016, meaning more retired men are missing out on the highest payout.
In many cases, poor health prompts people to collect early. According to a 2016 Nationwide Retirement Institute study, 19 percent of recent retirees drew early in order to cover health care costs, and 38 percent said their health problems have kept them from living their ideal retirement. Health issues aside, the vast majority of retirees who drew early did so to pay living expenses, supplement their income and cover the costs of unexpected early retirement.
The result of Social Security dependency in the current healthcare environment?
“Depending on Social Security is no different from depending on a pension,” says Sean Sturges, financial advisor with D.A. Davidson & Co. “For anything that can’t be paid for with your monthly income stream, you’re looking at a Medicaid situation. Even though the net present value of Social Security may be large, you can’t get a lump sum.” Medicaid dependency may also lead to Social Security garnishment, making it even tougher for clients to protect their assets and quality of life.
Another key consideration for early retirees: Even though individuals are eligible for Social Security collection at age 62 1/2, seniors aren’t eligible for Medicare until 65. With rapidly rising rates on the individual market, clients can expect to spend even more on health insurance in those interim years. If there isn’t another income stream to cover these expenses, early collection coupled with a sky-high premium could have a disastrous impact in the critical early years of retirement.
How can clients preserve their benefits and avoid asset depletion and Medicaid dependency?
“We want to create tax-free streams of income before people go on Medicare,” says Rosemary Caligiuri, managing director for United Capital in Langhorne, PA.