Health costs may gobble up social security benefits

Health costs may gobble up social security benefits

• social security benefits claiming strategies
• health insurance significant factor

Special to CNBC Original Link
By Tom Anderson

Health care costs could drain your Social Security benefits in retirement, especially if you’re a woman.

The average woman could spend an estimated 70 percent of her retirement check on health care costs, according to a recent study by the Nationwide Retirement Institute. The average man fares better, but still uses nearly half of his benefits to cover medical expenses.

Here’s how the Nationwide analysis reached its disturbing estimates: It assumed a woman with a life expectancy of 88 married a man who would live to 85 and they both claimed Social Security at 62, which is the earliest and most popular age to file for retirement benefits, regardless of gender.

More than half of elderly married couples and nearly 75 percent single retirees depend on Social Security for the majority of their income in retirement.

“Women disproportionately rely on Social Security in retirement,” said Nancy Altman, co-director of Social Security Works, which advocates for the expansion of the program. In fact, roughly two-thirds of Social Security beneficiaries age 85 and older are women.

In the Nationwide’s bleak scenario, the man collects a monthly benefit of $1,543 and the woman collects $1,171 per month. (The average monthly benefit for a retired worker is $1,350, according to the Social Security Administration.)

Nationwide projects hefty health costs for the hypothetical couple.The man would pay $214,278 in medical costs in retirement and the woman would pay more than $289,682, because of her longer lifespan. The forecast includes what the couple would have to spend on long-term care at a nursing home or in an assisted living center.

Though medical costs often greatly increase toward the end of life, the expenses average out to $776 per month for a man and $928 per month for a woman in Nationwide’s estimates.

By comparison, Fidelity Investments estimates a 65-year-old couple retiring in 2016 will need $260,000 to cover health care expenses and $130,000 to pay for long-term care for a total retiree medical cost of $390,000.

No matter what your exact health care costs are in retirement, you can take steps now to reduce them:

Delay claiming Social Security

If you are in good health, the easiest way to keep health care costs from devouring your benefits is to wait to take Social Security.

If you claim at 62, your benefit would be about 25 percent lower than it would be at your full retirement age, which varies from 66 to 67 depending on when you are born, for the rest of your life. Most people claim before that age.

Wait beyond your full retirement age and your benefit grows by roughly 8 percent each year until age 70. Put another way, it means that waiting until from age 62 to age 70 could increase your benefits by 76 percent.

“Women frequently claim Social Security early when their older spouses retire instead of waiting to maximize their benefits,” said Roberta Eckert, vice president of the Nationwide Retirement Institute.

Use a health savings account

Health savings accounts offer three major tax benefits for retirement savers. The contributions are tax deductible and grow tax-free. Plus, account withdrawals are tax-free too if used for qualified medical costs.

The downside is that you have to use a high-deductible plan to get access to an HSA and you may have to tap the account to pay health costs before retirement.

You can contribute up to $3,400 to the HSA in 2017 if you have individual coverage, or $6,750 for family plans. You can add a catch-up contribution of $1,000 if you are at least 55.

Shop for better insurance in retirement

When you collect Social Security, your Medicare Part B premiums, which pays for medical insurance if you are 65 or older, is automatically deducted from your benefits. In 2017, most people pay $109 per month for Part B, but people with incomes above $85,000 for individuals and $170,000 for couples have higher premiums.

Most Medicare Prescription Drug Plans charge a monthly fee that varies by plan. Medicare Part D, the drug coverage, can be deducted from your Social Security benefits too

Medicare doesn’t cover everything. Part B pays only 80 percent of covered expenses, leaving you to pay the other 20 percent, with no cap on your maximum out-of-pocket spending.

Seniors often use Medicare Advantage and Medigap plans to handle those expenses.

“Use an insurance broker to help weed through all of the plans to find one that fits your needs at the best price,” said Kristin Sullivan, a certified financial planner in Denver. “Shop around for better pricing during open enrollment in the fourth quarter.”

Employ advocates and specialists

The health care system is so complex for retirees that many financial advisors recommend their clients turn to experts for help if they can afford it.

“One of the best ways for retired clients to save on health care costs during retirement is to use the services of a health care advocate as well as a personal insurance bill payer specialist,” said Mark LaSpisa, a certified financial planner with Vermillion Financial in South Barrington, Illinois.

A health care advocate is trained to help people avoid unnecessary medical costs, but their services can run as high as $300 per hour.

Billing specialists, which can cost up to $200 per hour or take up to 35 percent of any savings they find, dig into the minutia of medical invoices to make sure you were not overcharged and don’t pay anything that should be covered by your insurance.

If all that sounds too pricey, prevention may be better than a cure.

“Keep yourself as fit and healthy as possibly by eating right and doing moderate exercise every day,” said Kathryn Hauer, a certified financial planner with Wilson David Investment Advisors in Aiken, S.C. “Unavoidable health crises can hit hard, but the fitter you are, the better you will be able to weather them.”

A few more thoughts from Mark La Spisa…

“Health insurance costs in retirement” is not a very often discussed topic in retirement planning. The fact that health costs can be anywhere between $400,000, $500,000, or even $600,000 for an individual or a couple is a significant amount of money.

Most retirement analysis consider ongoing increased costs in retirement planning, so most advisors do not pull out and focus singularly on any one part of a retiree’s budget. That being said, health cost is a significant issue and most financial advisors will review a retiree’s health benefits, their Medicare supplements, and their long-term care insurance to make sure that they’re adequately covered.

Considering the fact that this topic is not written about very often, I thought the author did a decent job of addressing the issue. The fact that he talks about how much of a retiree’s Social Security income goes toward health care, potentially underestimates the fact that many retirees have other sources of income besides Social Security. Pensions, portfolio income, distributions from IRAs or 401Ks were not considered as part of the overall income picture in this article. The author seemed to focus on those retirees whose only source of income was Social Security.

I would also like to point out that once a person gets to retirement there’s not a lot they can change from year to year.

Either their employer provides health insurance for retirees, or they don’t. If employees are 65 and older, they qualify for Medicare. If so, they need to get a Medicare supplement for medical expenses. The only analysis that’s being done there is in choosing the company you want to utilize for your Medicare supplement coverage.

Another issue to consider is whether or not you’re going to apply for long-term care insurance. If you did not do it prior to retirement, then you may fail to qualify for coverage once you have entered retirement, and the older you get, the less likely you will be able to qualify.

The fact that health savings accounts were discussed as a tool for pre-retirees to consider funding was a good idea. However, what wasn’t discussed was the long-term compounding effect for someone using a health savings account at an even earlier stage of life. If started at age 20 or 30, and funded up to or through retirement, that account can grow to be quite large and potentially cover all your projected retirement health care costs.

Is it true that women spend more than men on health care costs in retirement? Absolutely, and the simple reason is because women tend to outlive men.

So, if an average man lives 15 years in retirement and an average woman lives 20 years in retirement, then the woman is going to spend more. Add to that the fact that most women are better health care consumers then men, utilizing more services and participating in more preventative measures. Men tend to resist going to the doctor and sharing their medical concerns, resulting in a higher degree of heart attacks and other issues that shorten their lives.

It is not just the gender difference that impacts women’s health expenses in retirement. The disparity between men’s income and women’s income before retirement is usually the reason for differences in their Social Security benefits. The fact that many women have portions of their working years and careers interrupted for those years when they’re staying home and raising children is what ultimately impacts their Social Security benefits. As a result, if you have a lower benefit, you’re going to pay more of that benefit toward health care costs in retirement.

You may think that this is a good reason to defer taking Social Security benefits for as long as you can, but in the big picture, it’s not going to make that much of a difference. Social Security benefits are based on an actuary table of how long they project you will be taking your benefits.

If somebody is projected to get 20 years of benefits, then that’s how their monthly income is set – over 20 years. If they decide to take it early, now they’re getting 24 years of benefits versus 20 years, but the total amount remains the same. Or, if they decide to take it later, they’re getting 16 years of benefits versus 20. Once again, the same bucket of money is just spread over a different number of years.

There is one recommended strategy for reducing health care costs in retirement in that the healthier you are, the lower your health care costs will be.

More than anything else, physical fitness is probably the biggest factor in reducing your health care costs. Good diet, being proactive with your medical care, and maintaining your overall physical well-being will go a long way towards minimizing those health care costs in retirement.

Wishing you financial prosperity, Mark La Spisa