There is a Retirement Healthcare Crisis: Be Prepared
As the nation’s 78 million Baby Boomers head toward retirement age, federal budgets for Medicare and Social Security are expected to be strained. At the same time, many aren’t fully prepared for a financially secure retirement. Only 18% of people reported being “very” confident in having enough money for a comfortable retirement in the Employee Benefit Research Institute’s 2014 Retirement Confidence Survey, while nearly a quarter said they were “not at all” confident in a financially secure retirement.
There are three significant trends behind the emerging crisis in retirement health care costs, says Healthview Insights in a recent report addressing the upcoming crisis:
- Underestimation of how much they’ll have to pay for healthcare in retirement
- Healthcare cost inflation is higher than Social Security inflation
- Medicare costs will continue to rise, but benefits will be reduced
Out of pocket costs: Many people approaching retirement mistakenly believe Medicare will cover all or most of their healthcare costs. The majority of Boomers have had their health insurance subsidized by employer-sponsored health insurance programs, many of which often covered up to 75% of total healthcare premiums, says the report.
“Over the next 20 years, these Boomers will be entering the Medicare system – and most of them falsely assume that Medicare will take over where their employers left off and they will pay only a relatively small portion of their healthcare costs,” says Healthview Insights. “They are wrong. Medicare only covers approximately 51% of total health care expenses.”
Inflation: Another trend: inflation is rising much faster for basic healthcare than for Social Security benefits. The inflation rate for healthcare, at 5% to 7%, is three to four times Social Security’s last cost of living adjustment of 1.7%.
“If this trend continues, the majority of retirees living on a fixed income will not be able to keep pace with health care costs,” warns Healthview Insights. For example, a 65-year-old Massachusetts couple signed up for Medicare Parts A, B, D and Medigap insurance could currently be expected to pay $7,020 in Year 1 premiums. But if that same couple is only 55 years old today and wants to start Medicare in 10 years, their Year 1 healthcare premiums at age 65 will balloon more than 64% to $11,536, according to the report.
Reduced Benefits: As healthcare costs rise and more people enter the system, Medicare is encountering more and more pressure, leading to the third troubling trend: reduced benefits.
Health insurers participating in the Medicare Advantage program, which covers 16 million older adults, are facing a payment cut in 2015. Further, Medicare already accounts for about 15% of federal spending and it’s the fastest growing program in the federal budget, according to Healthview Insights, with spending expected to double from 2012’s $557 billion to more than $1 trillion by 2023.
With more Boomers retiring and fewer in the workforce paying into the Medicare payroll tax, the primary source of the program’s insurance trust fund revenue is in jeopardy, the report says, and this is expected to eventually shift more healthcare costs to retirees.
Despite the impending crisis, it’s still possible to avert a personal dilemma by planning ahead in a few different ways, including optimizing Social Security benefits, preparing to work longer than anticipated, guaranteeing future income by purchasing an annuity and also by purchasing supplemental Medicare insurance.
Time Social Security Payments to Optimize Your Benefits
The full retirement age for Social Security is currently 66 years old, but people can take an early retirement at age 62, or they can opt to delay retirement until age 70. The timing of retirement impacts how much money is received, both on a monthly and cumulative basis.
For example, a 62-year-old male with an average annual salary of $85,000 could expect to receive about $1,776 a month if he claims benefits today, using AARP’s Social Security calculator. By waiting until the full retirement age, he would get $2,369 a month, and delaying retirement until age 70 would result in monthly benefits of $3,127. The increased income could go a long way toward funding retirement costs.
Plan on Staying in the Workforce Longer
Many people have an approximate time frame when they expect to retire, typically around age 66, the current full retirement age for Social Security. But there are a couple reasons to put off retirement and remain in the workforce for a couple extra years.
- The longer people work, the more money they’ll earn, gaining the ability to keep setting aside a portion of that income for retirement. Nearly seven in 10 workers (65%) are planning to work for pay in retirement, according to the EBRI Retirement Confidence Survey.
- People who keep working and put off claiming Social Security benefits will receive higher monthly payments for the remainder of their lifetimes when they do retire.
Guarantee Retirement Income With an Annuity
Especially in a time when fewer and fewer companies are offering defined benefit pension plans to their employees, many people are looking for ways to achieve a fixed income stream in retirement. A lifetime income annuity does just that: buying this type of annuity guarantees fixed income payouts for life.
Let’s say 60-year-old Thomas invests $150,000 into a lifetime income annuity and opts to start receiving payments in five years. Once the annuity payments commence, he will be guaranteed $1,179 each month for the rest of his life (using today’s interest rates) for an estimated lifetime value of $150,000 beyond Thomas’s initial investment, according to NewRetirement’s Lifetime Annuity Calculator.
Purchase Supplemental Medicare Insurance
There are a huge variety of Medicare Supplemental Insurance plans. These policies can help you minimize and manage the costs of co-payments, prescription drugs, deductibles and more.
Explore Ways to Fund Long Term Care
The research suggest that 42% of people over the age of 65 require or will require long term care. Long term care is hugely expensive and not at all covered by Medicare.
Long term care insurance can be purchased, but these policies have become tremendously expensive. Some retirees are buying deferred lifetime annuities as a way to play for long term care costs. A deferred lifetime annuity is an annuity that you buy now and specify a date in the future when income stream starts. This income will then continue until you die.
If you are lucky and do not require that this income be used for long term care, then it can be spent in anyway you want.
While awareness about future healthcare needs–and their associated costs–is growing, only a minority of financial advisors and their clients are starting to integrate healthcare costs into retirement plans, says Healthview Insights. But by planning ahead, it’s possible to avoid a crisis and enjoy a comfortable retirement.