The New Finance of Longevity

Retirement Health Costs May Top $1 Million


Even healthy couples should plan for extensive health costs 
over the course of their retirement

New report published by HealthView Services shows health care costs have risen by 65 percent over the last six years. Access full report here.

DANVERS, MA, December 8, 2020 – Since publishing its first data report in 2015, HealthView Services has continued tracking rising health costs. According to its new report published today, health care costs have risen by 65 percent over the past six years. Retired couples, including those who are healthy at retirement, could reasonably expect their health costs to reach $1 million through the course of their retirement years.

In its newest Retirement Healthcare Cost Data Report, HealthView Services explains how choices that even healthy couples make can change their healthcare cost projections from under $200,000 to more than $1 million. For a healthy 65-year-old couple retiring in 2021, total costs for premiums and out-of-pocket expenses will average $662,156. The report also explains that if this couple starts receiving Social Security payments at 65, healthcare expenses will consume 68 percent of their benefits, leaving far less than many might expect for other living expenses such as housing.

“Data show that when motivated by personal projections of retirement health costs, people increase their savings,” said Ron Mastrogiovanni Sr., chief executive officer, HealthView Services. “It is a sobering moment for many when they see their personal health cost projections, but it opens the door for advisors to build a multi-prong strategy that helps them meet their future needs.”

The 2021 report offers insights on health cost projections that can inspire clients to embrace a long-game strategy, demonstrating the real value that financial advisors equipped with access to data for personalized healthcare cost projections can bring to their clients. With this information, advisors can suggest a thoughtful portfolio of products that limits exposure to weighty modified adjusted gross income-based surcharges at time when financial flexibility may be more limited.

“All people want a secure, comfortable and independent retirement, but a 65 year-old couple will see their health-related expenses grow by an average of 5.9 percent each year through retirement, a substantial compounding of costs at a time when income is flat or declining,” said Michael Daley, director of marketing and the firm’s Medicare and Social Security policy expert. “The data in this report is valuable. It helps people understand their future health costs so they can plan for them.”

Healthcare Cost Inflation Rates

The historical trend of healthcare costs rising 2 to 2.5 times faster than overall U.S. inflation is projected to continue. The rise in costs can be tied to several factors, but one of the greatest is the limited price elasticity of healthcare. In other words, people pay for healthcare regardless of cost, because they need it.

However, not all health costs increase at the same rate. Different types of premiums and individual types of care will rise at varying rates in the coming years, as shown in the table below. That’s why it’s impractical to apply a single inflation rate to all healthcare components.

With premiums and out-of-pocket expenses combined, a healthy 65-year-old married couple will experience an average annual healthcare inflation rate of 5.9% throughout the 23 years each are retired. This figure takes into account three factors:

  • The weighted healthcare cost inflation illustrated above
  • In addition to cost inflation, Medigap utilizes an age-rating policy, which charges higher rates for individuals as
    they age (thus, costs increase by an average of 7.7% year-to-year)
  • Increasing need for out-of-pocket healthcare services as one ages

It is important to remember that the projected healthcare inflation rate is by no means guaranteed to remain the same over time. On the contrary, it may change every year depending on how the individual components shift. For example, while Part B premiums will only rise by 2.7% from 2020 to 2021, the long-term inflation rate is projected to be more than double that: 5.9%.

Health & Longevity

It is a sobering moment for many when they see their personal health cost projections, but it opens the door for advisors to build a multi-prong strategy that helps them meet their future needs...

Perhaps unsurprisingly, a person’s overall health is an important factor in how much they’ll spend on healthcare. Someone who is healthy and has few doctor visits per year can likely expect to pay less out of pocket annually than someone who suffers from a chronic condition that requires regular office visits and medication. Diabetes and high blood pressure, for example, can lead to higher out-of-pocket spending due to doctor visits, hospital stays, medical tests, prescriptions and other expenses. As discussed in the 2018 Retirement Healthcare Costs Data Report, properly managing these conditions can lead to reduced annual spending. Notably, 50% of U.S. adults have at least one chronic health condition.

However, people without chronic conditions – and even those who are in excellent health – don’t necessarily skate by with low costs. In fact, the healthier a person is, the more they’ll spend on retirement healthcare. They won’t pay more on an annual basis, but the total costs spread over the course of their lifetime can be higher due to a longer lifespan—which results in additional years of paying for healthcare. That’s why healthier people have all the more reason to prepare for these expenses.

Employing useful indicators can help financial professionals ensure that a client’s plan will cover their needs later in life. Those factors include:

  • Current age. Younger people have a slightly higher overall life expectancy than older people.
  • Gender. Women typically live about two to four years longer than men.
  • Health conditions. Chronic conditions can significantly impact how long a person lives, as well as the quality of those years.

Retirement Income

A person’s means is another important factor that can affect their healthcare costs. Medicare’s Income-Related Monthly Adjustment Amount (IRMAA), also known as Medicare means testing, determines how much an individual or couple pays for Medicare Parts B and D. In effect, the higher a retiree’s income, the more they pay.

It is important to note that IRMAA is based on an individual’s or couple’s modified adjusted gross income (MAGI), which includes some, but not all, common types of retirement income. The key is to help clients understand not only how much to save, but how to save it. Financial planners can help limit MAGI in retirement with products such as non-qualified annuities, life insurance, Roth IRAs, health savings accounts and others. HealthView Services’ 2019 white paper Medicare Surcharges: The Impact of Indexing IRMAA Brackets addresses this topic in much more detail.

Conclusion

Healthcare remains a significant cost to Americans in retirement: As this report indicates, an average, healthy, 65-year-old couple retiring today will spend $662,156 on healthcare costs in retirement. Their costs will increase by 5.9% per year, as healthcare cost inflation continues to more than double the rate of U.S. inflation.

It is worth noting, however, that the range of potential costs is broad. The COVID-19 pandemic underscores
the importance of planning carefully for healthcare expenses. Savvy planners must ensure that their analyses incorporate the full range of factors that affect retirement healthcare expenses—especially given that healthcare costs consume 68% of the average 65-year-old couple’s Social Security benefits. For instance, financial professionals should consider clients’ potential life expectancy, based on underlying factors including gender and health conditions. In addition, they should assess the impact of their clients’ income on healthcare expenses, given that IRMAA surcharges can increase Medicare Part B & D premiums by over 200%.

With a clear picture of their potential lifetime retirement healthcare costs, people can make informed choices now about their own health and finances.

 

 

About HealthView Services
Founded in 2008, HealthView Services is the nation’s leading provider of healthcare cost projection software, built on a data set of 530 million health care claims. Its portfolio of retirement healthcare planning applications centered on personalized longevity estimates and health care cost projections is used by advisors, financial institutions, employers and consumers to create comprehensive, reliable health cost projections for 36 million users annually. Visit us to know more: www.hvsfinancial.com.