The calculation, based on a 22-year retirement, was just released by HealthView Services, a firm that provides health care data and software to financial advisers trying to help clients look into the murky future of retirement health costs.
While you may want to deny the foreboding number, the calculation does not seem extreme.
The analysts are assuming that health care costs will grow 5.47 percent a year, which is not out of line with recent numbers. That increase will be double the 2.6 percent a year increases retirees can expect in their Social Security checks.
“You will see your Social Security eroded,” said Ron Mastrogiovanni, the chief executive officer of HealthView Services, who also is on the board of the Massachusetts Health Policy Commission.
If you are age 55 and looking ahead at retiring when 67, it gets uglier. According to the calculation, retirees will need to devote 90 percent of their Social Security proceeds to health care costs. And if 45, it’s even worse: Social Security won’t fully cover health care needs, as rising health care costs will end up absorbing 120 percent of your Social Security.
When calculating health care costs, the analysts assumed men would live to 87 and women to 89. Because women tend to live longer than men, a woman will pay more than the average man.
Although numerous polls have shown that one of the biggest worries of pre-retirees is that health care costs will crush their savings, “most people are far underestimating what they will need,” Mastrogiovanni said. “They assume that Social Security will cover all their basic expenses.
“That used to be the case, but not anymore,” he notes. In the past, more people received retirement health care coverage from previous employers, he said. In addition, Social Security’s annual cost of living increases are based on the nation’s overall inflation rate, and inflation has been muted since the 2008 recession. Between 2012 and 2016 it was just 1.9 percent a year, the report noted.
The analysts used health care data from companies, government sources and actuaries.
The analysis assumes that the 65-year-old couple will be retired for 22 years and pay for typical Medicare coverage, known as Part B, and typical Medicare drug coverage, known as Part D. Neither is free. Currently, the average premium people pay for Medicare is $134 a month. This year, the Medicare board of trustees had anticipated a decrease, but instead premiums rose 10 percent after rising 16 percent in 2016, noted the HealthView report.
The costs don’t end with Medicare, however. Medicare doesn’t cover all health care costs, so retirees also must buy supplemental insurance. There are also deductibles and copays.
As a result, the average 65-year-old couple can expect to pay $321,994 for Medicare and supplemental health insurance and $82,259 out of pocket, the analysts said.
The couple would be paying $947 a month now, or $11,369 a year. As time goes by and the couple experiences the 5.47 percent increase in costs each year, the cost for the same insurance and medical expenses will be $1,755 a month or roughly $21,060 annually at age 75, according to the analysis. At age 85, it would be $3,267 a month or roughly $39,200 for the year.
Mastrogiovanni contrasts the health care expenses to the Social Security received by the typical couple just starting retirement at age 66. Social Security would start at about $27,216 a year, but by age 75 it would be $40,869 annually. By 85, it would be $52,828.
When planning ahead for retirement expenses, “Don’t just look at the first year,” said Mastrogiovanni.
People in retirement spend about 32 percent of their annual budget on health care and 34 percent on housing, food and transportation, he said.
He warned people not to skimp by cutting out the supplemental insurance that covers medical expenses not covered by Medicare: “That’s a very dangerous game to play,” he said. “You can downsize on some expenses, but not health care.”