The impact of health costs on Social Security: another reason for an annuityArticle added by Dan McGrath on May 21, 2014
Dan McGrath

Dan McGrath

Windham, NH

Joined: April 03, 2013

With the rules of retirement having been changed and the average retiree depending on Social Security more and more, the need to be able to help them generate another form of guaranteed income has never been greater.

Social Security planning is the hot subject for many financial planners today, and with good cause. To highlight the importance of it, all one needs to look at is the fact that, according to Social Security, over 50 percent of all retirees today rely on more than 50 percent of their income in retirement to come solely from Social Security.

The problem with this planning, though, is that it's not going far enough for the investors. We, as an industry, are missing what will be looked upon later as the single greatest opportunity to help our clients plan for their future accordingly.

Here are some stats:
  • Less than 8 percent of the total population has ever factored in health costs into any financial plan, let alone how this cost should be factored into their strategy on how to collect Social Security.

  • Certain Medicare premiums and any income-related monthly adjustment amounts are automatically deducted from a person's Social Security benefit, and because of this, we are missing one of the biggest opportunities ever to help our clients.

  • In order to receive any Social Security benefit, a person must also accept Medicare when eligible or they will forfeit all current, future and even past benefits received.
To highlight this missed opportunity, let's take an example of an average couple.

The couple’s information:
  • They are both 60-years-old.
  • They both are contemplating collecting Social Security at age 66, which is their full retirement age.
  • The husband earned $50,000 a year on average his entire working career.
  • The wife earned on average $40,000 a year on average her entire working career.
  • In retirement, they will never hit the first Medicare income bracket (Medicare is now means-tested, meaning it is based on how much income a person has).
Their Social Security information:
  • For him, the Social Security benefit at 66 will be $21,288 — his full retirement benefit (FRB).
  • For her, the Social Security benefit at age 66 will be $18,384 (her FRB).
Both figures were determined using Social Security's quick calculator, which can be found here.

Going forward, the Social Security cost of living adjustments (COLA) will be 2.8 percent. This data has been provided by the Social Security Board of Trustees and can be found here.

Due to Medicare Part B and Part D, having late enrollment penalties, this couple will enroll into Medicare once they are eligible after retirement (at age 66).
Part B info:

Data provided by the Medicare Board of Trustees:
  • $104.90 — Medicare Part B premium a month
  • 7.856 percent — Medicare Part B historic inflation rate over the last 47 years
Part D information:
  • $61.10 — State of Idaho monthly average according to Q1medicare.com
  • 7.155 percent — The projected rate of inflation according to the Medicare Board of Trustees
MediGap Plan F information:
  • $173.58 — State of Idaho average monthly premium for females according to Weiss Ratings
  • $188.25 — State of Idaho average monthly premium for males according to Weiss Ratings
  • 5 percent — According to AARP the average rate of inflation for MediGap policies since 1997
The figures below help show how the costs associated with health coverage will impact a person or couple’s Social Security benefit.

For him:
  • The Social Security benefit in 2020 at age 66: $21,288.
  • The expected overall cost of his health care premiums in 2020 at age 66: $6,118.67.
  • The actual amount received from Social Security: $15,169.33.
  • Health care by 2020 will consume close to 29 percent of his Social Security benefit.
  • By 2038, when he is 85 years old, health care will consume just over 55 percentof his Social Security benefi.
  • If he lives until age 90, that percentage will increase until it is 67 percent.
  • His Social Security benefit will never increase.
For her, things are even worse:
  • The Social Security benefit in 2020 at age 66: $18,384.
  • The expected health care premiums in 2020 at age 66 are the same as his: $6,109.34.
  • The actual amount received from Social Security: $12,274.66.
  • The cost of health care in 2020 will consume just over 33.2 percent of her Social Security benefit.
  • By 2038, when she is 85, health care premiums alone will be about 65 percent of her Social Security benefit.
  • If she lives until age 90, that percentage will increase until it is 77.8 percent.
  • Her Social Security benefit will never increase.
Please note that by delaying benefits, there will be a more positive result for this couple, while accepting Social Security at a younger age will result in a more adverse result in terms of not only income, but also taxes.

With the rules of retirement having been changed and the average retiree depending on Social Security more and more, the need to be able to help them generate another form of guaranteed income has never been more greater, because what they don't know about retirement will hurt them.
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