The Impact Of Health Costs on Social Security

In light of the changing rules of retirement, increasing costs of care and premiums, and the average retiree depending on Social Security more and more, the need of retirees to generate another form of guaranteed income has never been greater.

Less than 8 percent of Americans have factored health costs into their financial plan or their strategy on how to collect Social Security, which over half of all retirees today rely on for more than 50 percent of their income in retirement.

Considering that Medicare premiums and any income-related monthly adjustment amounts are automatically deducted from a person's Social Security benefit, and because they must also accept Medicare when eligible or they will forfeit all current, future and even past benefits received, taking health care into consideration when planning for retirement is more important than ever.

To highlight the impact of health care costs on retirement under a fixed Social Security income, let's take an example of an average couple.

Husband and wife are both 60 years of age and plan on 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 over 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).

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 full retirement benefit (FRB).

Both figures were determined using Social Security's quick calculator. Social Security has also provided more extensive benefit calculators for more in depth calculations - Retirement Estimator, Life Expectancy Calculator, and Retirement Age Calculators are available.

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.

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 Data provided by the Medicare Board of Trustees:

• $134 — monthly Medicare Part B premium
• 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 the Husband:

• 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 percent of his Social Security benefit.
• If he lives until age 90, that percentage will increase until it is 67 percent.
• His Social Security benefit will never increase.

For the Wife, 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.

Delaying benefits will create 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.