Are health-care costs really ‘just’ $245K in retirement?
When it comes to planning for health care in retirement, I want to discuss a recent report from a financial services corporation that estimates a couple age 65 today should expect to incur $245,000 in total health-care expenses in retirement.
For those who have experienced our nation’s health-care system at work — and the total costs that can be incurred in such an encounter — it may appear, upon deeper analysis, that this number might be drastically off.
I actually believe that very scary $245,000 figure is really too low.
What is known is that the report provided the following specifications for how the figure $245,000 was derived: The estimate is, once again, for a couple in which each partner is 65 years old, plans on retiring today and has an average life expectancy of 85 years for a man or 87 for a woman.
The estimate also assumes that this couple will incur costs that include coverage of all co-pays, deductibles and even out-of-pocket costs, as well as certain services excluded by original Medicare, which could be defined as having a Supplemental MediGap Plan F policy. The report even goes so far as to provide an inflation rate of between 4 percent and 5 percent.
But again, once this expense is analyzed, the monetary figure may not be what many are expecting it to be.
According to Medicare, a person retiring today could expect to incur roughly $4,123.08 in annual costs for their health coverage in retirement. The breakdown is as follows:
- Medicare Part A: No premium, with all other costs covered by a MediGap Plan policy.
- Medicare Part B: Premium of $104.90 per month, or $1,258.80 a year per person, with all other costs covered by a MediGap Plan policy.
- Medicare Part D (prescription drug coverage): According to Medicare and Q1Medicare.com, the average national premium for retirees in 2015 is $53.19 a month, or $638.28 a year per person.
- MediGap Plan F policy: According to Weiss Ratings, the national average premium for males is roughly $193 per month, or $2,316 annually, and for females the average premium is roughly $178 a month, or $2,136 annually.
For just health coverage premiums alone in retirement, a couple retiring today should expect to incur about $8,246.16 — and again, this is just for premiums. The figure does not include other out-of-pocket costs, such as expenses for dental services, eye exams or glasses, or even deductibles for prescription drugs.
If simple mathematics are applied — meaning, we take our known price of $8,246.16 and inflate it at the lowest inflation rate used in the report, which is 4 percent through each person’s life expectancy — the figure we arrive at is actually $282,317.70. At a 5 percent inflation rate, the expected costs are projected to be $317,580.50. Both figures are somewhat higher than the report’s $245,000.
In order to reach the “lower” number, the inflation rate would need to remain at just over 2.75 percent throughout the lifespan of this couple.
But again, there are issues with that inflation rate as well. Medicare, through its Board of Trustees, not only provides us with past inflation rates but also provides future inflation rates. These project the annual growth rate of inflation for the majority of these premiums to be closer to 6.2 percent (the 48-year historic inflation rate has been more than 7.5 percent).
At that inflation rate, our annual health-care cost of $8,246.16 per couple in 2015 for premiums alone totals closer to $367,000 over their entire retirement. This appears to be somewhat higher than the estimate from that recent financial firm’s report.
The other issue with this one particular expense is that for a few retirees, it will be pegged to the income they make in retirement. And the more they have, the higher some of these premiums can be.
According to Medicare, retirees who happen to earn more than $85,000 as an individual or $170,000 as a couple can expect to see a 40 percent surcharge added to their Part B premium, as well as see a higher dollar cost for Part D. And the higher the income goes, the higher the penalty inflates.
Granted, not many retirees will fall into this category, but for those who do, the estimate that is provided by that much-publicized report will not even be in the same hemisphere as what they have planned for.
With a new Department of Labor ruling possibly imposing the “fiduciary” rule onto today’s financial advisor, it has never been more important to ensure that the costs of a retiree’s greatest asset, his or her health, be more accurate than before.
The issue that may lie before us is that many of our retirees might start feeling a squeeze in their income — especially at a time when going back to work is no longer an option — which may lead to an even rockier retirement than imagined.