Social Security provides one of the most dependable sources of income for retirees and their families. In fact, for a majority of retirees today, Social Security accounts for at least half of their income (Source: Fast Facts & Figures About Social Security, 2013). What we are seeing, however, is more of that income being spent on health-related costs each year, leaving less available for other retirement expenses.
The importance of Social Security
Social Security is so critical because it provides a retirement income you can’t outlive. In addition, benefits are available for your spouse based on your benefit amount during your lifetime, and at your death in the form of survivor’s benefits. And, these benefits typically are adjusted for inflation (but not always; there was no cost-of-living increase for the years 2010 and 2011). That’s why for many people, Social Security is such an important source of retirement income.
Rising health care costs
You might assume that when you reach age 65, Medicare will cover most of your health-care costs. But in reality, Medicare pays for only a portion of the cost for most health care services, leaving a potentially large amount of uninsured medical expenses. How much you’ll ultimately spend on health care generally depends on when you retire, how long you live, your health status and the cost of medical care in your area. Nevertheless, insurance premiums for Medicare Part B (doctor’s visits) and Part D (drug benefit), along with Medigap insurance, could cost hundreds of dollars each month for a married couple. In addition, there are co-pays and deductibles to consider (e.g., after paying the first $147 in Part B expenses per year, you pay 20 percent of the Medicare-approved amount for services thereafter). Your out-of-pocket yearly costs for medical care, medications and insurance could easily exceed thousands of dollars.
Medicare’s impact on Social Security
Most people age 65 and older receive Medicare. Part A is generally free, but Parts B and D have monthly premiums. The Part B premium generally is deducted from your Social Security check, while Part D has several payment alternatives. In 2013, the premium for Part B was $104.90 per month. The cost for Part D coverage varies, but usually averages between $30 and $60 per month (unless participants qualify for low-income assistance). Part B premiums have increased each year and are expected to continue to do so, while Part D premiums vary by plan, benefits provided, deductibles, and coinsurance amounts. And, if you enroll late for either Part B or D, your cost may be permanently increased. In addition, Medicare Parts B and D are means tested, meaning that if your income exceeds a predetermined income cap, a surcharge is added to the basic premium. For example, an individual with a modified adjusted gross income between $85,000 and $170,000 may pay an additional 40 percent for Part B and an additional $11.60 per month for Part D. Note: Part C, Medicare Advantage plans, are offered by private companies that contract with Medicare to provide you with all your Part A and Part B benefits, often including drug coverage. While the premiums for these plans are not subtracted from Social Security income, they are increasing annually as well.
The bottom line
What’s a concern here is that Medicare premiums and out-of-pocket health care costs can eat away at your social security income resulting as a serious drag on your required monthly income. Because of this, you may need to spend more of your retirement savings than expected for health-related costs, leaving you unable to afford large, unanticipated expenses. All in all, these kinds of potential scenarios can seriously impact the quality of one’s financial life in retirement.
This Month’s Parting Shot: According to data from Experian Automotive, long-term new car loans (from 72 to 84 months) have jumped 25.1 percent the past couple of years and now make up over 19 percent of all new-car lending. On the other end, short-term loans from 24 to 36 months have fallen 24 percent. With today’s trade-in’s average 11 years, the situation leaves consumers in a predicament. That being; the vehicle’s trade-in value is sure to drop a lot faster than the loan balance.
» Ike S. Trotter, CLU, ChFC, is a financial advisor in Greenville. Securities and investment advisory services provided through Woodbury Financial Services Inc., Member: FINRA, SIPC and Registered Investment Advisor, P.O. Box 64284, St. Paul, MN 55164. Tel: 800.800-2638. IKE TROTTER AGENCY, LLC, and Woodbury Financial Services are not affiliated entities. Information and opinions expressed are those of the author and not necessarily those of Woodbury Financial Services Inc.