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The Growing Impact of Retirement Healthcare Costs

The Growing Impact of Retirement Healthcare Costs

Last week we discussed the concept of “risk capacity” and its role in retirement financial security. Aside from retirement asset allocation, another part of income planning is accounting for expenses. Living expenses, long-term care costs, and healthcare expenses are three primary retirement cost drivers. It’s important to plan ahead and to have a strategic combination of volatile and conservative financial vehicles to meet these needs.

Just healthcare needs alone can impose a significant cost burden on your retirement lifestyle. In fact, research firm HealthView Services reports they’re one of the fastest-growing segments of retirement spending. Ensuring they aren’t neglected is a critical step. Otherwise they can be financially draining and greatly impact your standard of living in retirement.

What’s Going on with Healthcare?

In the 2016 Retirement Healthcare Costs Data Report, HealthView gives some startling projections for future healthcare costs:

  • In 2015-2016, retirement healthcare costs are estimated to have risen 7.3%
  • To show the difference from last year: Someone retiring today may have to pay $33,000 more than someone who retired a year ago due to healthcare inflation
  • For persons who retired in May 2016, healthcare inflation is projected to average slightly over 5.1% for the next 20 years
  • Supplemental insurance premiums are age-based, so some retirees could have an additional 4.5% increase (or greater) for supplemental plan coverage
  • Therefore, some retirees may have to deal with annual inflation of 9.6% or greater


As healthcare costs continue to rise, some recent legislative changes place even more direct fiscal burden for healthcare needs on retirees. These changes include:

  • The elimination of key Social Security filing strategies (like file and suspend)
  • A 16% increase in monthly Medicare Part B premiums
  • Zero cost-of-living adjustment for Social Security in 2016
  • Adjustment in supplemental insurance coverage (Plan F coverage) starting in 2020 


Lifetime Healthcare Spending and Impact on Social Security Benefits

To put all of this into perspective, consider these projections of total healthcare costs over retirement:

  • For a healthy couple aged 65 retiring in 2016, total healthcare premium payments (Medicare Parts B, D, and supplemental insurance) are projected to be $288,400
  • In future dollars, this amount would be $435,472
  • If you include out-of-pocket costs like deductibles, hearing, vision, dental, and copays, expenses would be $377,412
  • In future dollars, that would be $567,903
  • A 66-year-old couple retiring in 2016 would need 57% of Social Security benefits to cover total healthcare costs
  • In 10 years a 55-year-old couple would require 87% and a 45-year-old couple 117% of their benefits
  • For a 45-year-old healthy couple retiring at age 65, total premium payments would be $484,103
  • When out-of-pockets are factored in, a couple would be looking at total healthcare costs of $592,275 (or $1,614,712 in future dollars)


Accounting for Healthcare Costs with Income Planning

For many Americans, these projections are quite demanding. HealthView Services notes that using an “income replacement ratio” approach (or determining how much of your income needs to be replaced in retirement) would likely lead to financial windfalls.

To account for these needs, it’s important to have a suitable “time horizon” (a specified planning period for retirement saving) and appropriate vehicles to maintain suitable financial integrity. To that end, keep in mind the following:

  • Having too much of your assets wrapped up in volatile assets like stocks can be costly later on
  • If your portfolio takes a big hit due to a market downturn, it impacts the funds you’ll have for healthcare costs and other retirement needs
  • Should you incur losses in early retirement, you’ll have to work longer to cover future income needs, or have to cut back on your standard of living
  • Therefore, your portfolio should have a suitable mix of “risky” and conservative vehicles with reasonable growth potential to prepare you for future spending needs


If you’re interested in vehicles which offer principal and earnings protection, guaranteed income for life, and some growth opportunities, you may want to consider an annuity. If you’re considering an annuity, or any other product for that matter, take time to carefully research and understand all the details before committing to a purchase.

If you're ready for personal guidance and to formulate a retirement income plan for your future, SafeMoney.com can help you. Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

Author: Super User

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