Rising Medical Costs

Healthcare costs in retirement can be staggering. You are older, your body is more vulnerable and prone to disease and medical expenses increase every year. Even though Medicare offers some coverage to all Americans, most retired persons pay large out-of-pocket health care costs.

Many retirees are not prepared for the high-cost of medical care in retirement when they are no longer part of a company plan. And, too many people believe that Medicare covers most or all expenses. The reality is that Medicare only covers a percentage of your medical bills. According to analysis, average out-of-pocket health care spending by Medicare beneficiaries is sizable and increases with age.

• On average, Medicare beneficiaries aged 65-74 spend $2920 a year in out-of-pocket expenses.
• Those aged 75-84 spend $3,815, a year.
• And, those 85 and above spend $4,615 a year – an average of 30 percent of their income.

Almost half of these out of pocket health care expenses were for premiums for Medicare part B or private medical plans. Approximately another 24 percent of that spending - $830 a year - is for prescription drugs.

Fidelity's Health and Welfare consulting experts estimate that a couple retiring today at age 65 will need $160,000 in savings to pay for their health care tab, including insurance premiums and uncovered medical expenses but not any long-term care costs.

While this may seem obvious, this news is worst of all for retirees with the fewest assets. The fewer assets you have, the greater percentage of those assets will go to covering medical expenses – leaving even less money to cover your basic needs.

• Beneficiaries with incomes below 135 percent of poverty spent an average of 33 percent of their income on health care.
• Beneficiaries with incomes above 400 percent of poverty spent 12 percent of their income on health care.

Rising Medical Costs Dramatically Outpace Inflation

Medical costs in retirement are astronomical for a variety of reasons:

• You need more services as you age
• You pay higher insurance premiums
• Worst of all – the prices of medical services are rising dramatically - increasing every year far beyond the pace of inflation.

The cost of medical care has outpaced inflation for the past 20 years. These increases are expected to continue in the years ahead. Some industry surveys predict that costs will rise as much as 15 percent annually. This growth will double the cost of retiree health care in just five years.

Furthermore, health spending as a share of after-tax income will rise dramatically. In 2000, health care spending for older married couples was 16 percent of their total income. According to the Center for Retirement Research, that number is expected to increase to:

• 24 percent of income in 2010.
• 29 percent in 2020.
• 35 percent in 2030.

Why is healthcare getting more expensive? The answer is twofold. The bad news is that more is going wrong with your body. The good news is that there is more that medicine can do to fix you. Healthcare costs are increasing because of:

• Advances in medical technology – leading to better but more expensive treatments.
• Increases in the prevalence of expensive medical conditions.
• High administrative costs associated with a fragmented health care delivery and financing system.
• The existence of many highly paid medical specialists.

The medical profession is making some astonishing findings and treatments. These developments promise a remarkably long and hopefully good quality of life for the aged – but they will be increasingly expensive.

Prescription Drugs

The increasing numbers of prescription drugs represent miracle cures for many ailments. But, many seniors can not afford these drugs.

• In 2001, a poll found that 22 percent of all adults did not fill at least one prescription in the last year because of cost.
• The same study found that one in seven adults said that during the last year they had taken a prescription drug in smaller doses than prescribed because of the cost.

Congress has undertaken legislation to help solve this problem. But, as we saw above, large percentages of seniors' income is spent on prescriptions. And, those numbers are expected to increase.

Hear no evil, Say no evil, and See no evil

Picture someone old and you will likely see eye glasses, a hearing aid and maybe even dentures.

• In 1995, one-third of all non-institutionalized elderly persons 70 years of age and older were hearing impaired. And, this number increased to almost half of all 85 year olds and older.
• Prescription lenses are almost universal among older persons. Ninety-two percent of persons 70 years of age and older wear glasses.
• Recent surveys show that fifty percent of people age 55 and older wear partial or complete dentures.

But, believe it or not, neither Medicare nor Medicaid covers vision, hearing or dental. When planning for your retirement, you must include provisions for covering these health maintenance costs.

Government and Company Health Plans Will Change – Benefits to decrease

So, how are you going to pay for the treatments, prescriptions and care that the medical community is developing?

• Medicare and Medicaid are forecast to be under funded.
• Company insurance plans for retired employees are disappearing.
• Medical insurance is becoming more expensive.

Even though Medicare and Medicaid currently do not meet the real insurance needs of many of our nation’s elderly, benefits will probably decrease or change.

It is likely that you are aware of the problems of Social Security being overtaxed by large numbers of people entering retirement and the increasing longevity of those people – often called the baby boomer retirement "bubble." If policy-makers foresee problems for Social Security caused by this bubble, then issues for Medicare and Medicaid are full scale disasters. Some data suggest that the unfunded liability of Social Security is $9 billion while the unfunded liability for Medicare is more than three times that amount – projected to be $30 billion.

To put the situation another way -- the Medicare trustees predict that program costs will grow rapidly over the next 75 years. In 2000, Medicare consumed 2 percent of the Gross Domestic Product (GDP) in the United States. By 2030, Medicare will reach 7 percent of the nation's GDP, and 14 percent 2080. This is a staggering percentage of the nation's budget and is unsustainable.

It is not known how the United States government will fund these programs but it is very likely that benefits will be lowered. Or, perhaps the overall structure of medicine will change completely.

Companies too are trying to figure out how to fund private insurance for their retirees. The baby boomer retirement "bubble" is forcing employers to reconsider how they structure their retiree health insurance plans. Nearly three fourths of large employers intend to make changes over the next two years, an industry survey has found. It is almost guaranteed that these changes entail cutting benefits or the amount the company pays toward those benefits.

These developments are making it more important than ever for employees to familiarize themselves with what their employers offer and to evaluate how health care costs will impact their retirement.

Special Note: Retiring early has expensive insurance consequences

Medical care is going to be expensive no matter when you retire, but the picture is more serious for employees who retire early, by choice or otherwise.

Because of the high cost of medical coverage before Medicare eligibility, a typical worker retiring at age 62 who does not have any subsidized retiree-medical benefits would replace only 59 percent of his or her pre-retirement income, according to Hewitt according to Hewitt Associates, a management-consulting firm.

Because Medicare isn't available until age 65, a couple retiring today at age 60 needs in excess of $200,000 to cover medical expenses in retirement – verses $160,000 if they retired at 65.

Medical costs in retirement just keep adding up. A summary of insurance issues to include in your retirement plan includes:

• Private medical insurance to cover you where Medicare leaves off.
• The high rate at which medical costs are increasing (Approximately 15 percent a year – much higher than the 3 percent rise in inflation.)
• Possible reductions in benefits from the government.
• Possible reductions in benefits from company plans for retirees.
• Prescription drug coverage.
• Dental, Hearing and Vision coverage.
• Your retirement date.

Learn more about Medicare Supplemental Insurance and Long Term Care Insurance and how these products can protect your retirement assets.