Social Security planning is a major focus for financial advisors and their clients — and with good cause. If you look at the data and statistics from Social Security, the reason is clear: Among elderly Social Security beneficiaries, 53 percent of married couples and 74 percent of unmarried people receive half or more of their income in retirement from Social Security.
The problem with Social Security planning, however, is that most folks are not prepared for — or just don’t understand — how much of their monthly Social Security benefit will be consumed by health-care expenses.
According to the Social Security Administration, the average beneficiary in 2016 can expect to receive about $16,092 a year. This same person, who would like to be fully insured with medical coverage, can expect to see their Medicare premiums total close to $4,300 a year. This is just premium costs for their Medicare Part B, Part D and a Plan F MediGap policy.
To quantify this, the average retiree who hopes to be fully insured for health coverage may potentially see more than 26 percent of their Social Security devoured by health costs that are derived specifically from just their premiums for coverage. This does not include any deductibles, co-pays, cost sharing, etc.
Granted, retirees can lower their health-care premiums by selecting a less benefit-rich MediGap plan or forgoing one entirely, but they expose themselves to higher out-of-pocket health costs if they actually need care, especially as they age and the costs of care rises.
And the issue does not lie in year 1, as both the Social Security cost-of-living adjustments and Medicare premiums are not expected to inflate on an equal level. According to the Social Security Board of Trustees, the expected COLA going forward will be no higher than 2.7 percent, while the costs associated with Medicare are expected to inflate by at least 5.35 percent.
The Medicare Board of Trustees is reporting that Medicare Part B premiums are expected to inflate by 5.76 percent through 2024, while Part D premiums are expected to inflate by 7.1 percent within in the same time frame. Meanwhile, MediGap Plans are expected to maintain their historic inflation rate of 3.25 percent.
In just 10 years, these health-care costs and premiums are projected to consume less than 40 percent of a retiree’s Social Security benefit. At age 85, this cost (if the inflation rates stay constant) may consume more than 55 percent of their Social Security benefit.
With studies concluding that fewer than 10 percent of the U.S. population has factored in any of these costs into any financial plan, and with millions of Americans relying on Social Security to be a major source of their income, there may be an even greater issue waiting ahead for many retirees.
Obviously, the simple, knee-jerk response or solution is to save more money. But it is not so clear-cut. A decade ago, changes to Medicare affected the way one should consider saving. Simply deferring more money in pretax accounts may not be the answer. The same may be said about just loading up on solid “blue chip,” dividend-paying stocks.
Due to these Medicare changes, there is a requirement that the premiums for Medicare parts B and D are to be based on income. Currently, the definition of income has been altered to include any income generated from the withdrawals from traditional individual retirement accounts and traditional employer-sponsored retirement plans, such as 401(k) plans.
Because of these changes, one of the easiest solutions to having more favorable retirement income would be to use a Roth IRA vs. a traditional IRA; similarly, if you are participating in an employer-sponsored retirement plan, it may be wiser to pick the Roth option if offered.
The reason is simple: Distributions from Roth accounts do not count against you when determining Medicare premiums. The longer we live, the greater the costs for life’s necessities. It is safe to assume that our health costs will also increase as we age.
When your health is on the line, it is not something that can be put off, like not taking the vacation or buying a new car. Health care just happens to be one thing that we cannot and should not scale back on. The time to plan for these costs has to be now.
— By Dan McGrath, co-founder of Jester Financial Technologies