Source: Flickr user wonderlane

Social Security is a financial backdrop that’s been in place for nearly eight decades in order to help low-income retirees upon their retirement, as well as the disabled and surviving family members of qualified deceased workers. It’s also a program that covers 167.5 million current workers and is expected to pay benefits to countless millions in the future.

According to the latest data from the Social Security Administration, the average retired worker is pulling in $1,328 a month in benefits income, while retired workers with a full-retirement aged spouse are earning an average of $2,176 per month. Optimally, Social Security wasn’t designed to replace more than 40% of a worker’s salary in retirement, although this figure is higher for low-income individuals (55%) than it is for maximum earners (27%).

But based on a terrifying new report released by HealthView Services, the majority of your Social Security income will likely be used to help pay for healthcare expenses in the future if you’re unprepared for retirement.

Source: Flickr user frankleleon

Kiss your Social Security check goodbye
HealthView’s 2015 Retirement healthcare Cost Data Report derived data from some 50 million healthcare cases and took into consideration a number of factors that include age, gender, income, and even state of residence in order to calculate a person’s potential lifetime healthcare costs.

Per HealthView, retirees will have to cope with the costs for Medicare Part B and D (Part B covers medically necessary and preventative services, while Part D helps cover the cost of prescription drugs), as well as supplemental insurance. Additionally some individuals and couples will purchase variable health expenses such as vision, dental, hearing, as well as other co-pays and other out-of-pocket expenses that aren’t already included in Medicare Part B & D or covered by supplemental insurance.

Based on its retirement study, HealthView suggests that a 66-year-old couple today can expect healthcare costs to consume 67% of their lifetime Social Security benefits. For a couple that’s currently 55 years old and planning to retire at age 65, HealthView’s data suggests that 90% of their Social Security income will be used to pay healthcare expenses.

Assuming the laundry list of expected and variable expenses listed above, a couple of full retirement age retiring today could expect $394,954 in lifetime healthcare expenses, while a couple expecting to retire in 10 years at age 65 could see healthcare expenses of $463,849. In monthly dollar terms it means the average 55-year-old couple would need to sock away $1,206 per month if their goal were merely to pay for Medicare Part D and supplemental insurance.

If these figures weren’t scary enough, HealthView’s assessment assumes that couples will maximize their Social Security benefits, which is not always the case, and that medical cost inflation averages about 6% per year, which isn’t out of the question considering the history of medical cost inflation over the past 45 years. Also, these cost estimates could be conservative as the state you live in could inflate your medical costs, and pressure on the Medicare Trust Fund could adversely impact retirees’ out-of-pocket costs.

3 keys to retirement bliss
If HealthView Services study has taught us anything, it’s that the younger generation needs to start saving for retirement as early as possible in order to avoid being “surprised” later in life by medical expenses. I’d suggest there are three actions young Americans need to take to lessen their chances of falling victim to HealthView Services scary scenario.

First, young and middle-aged Americans need to trust in the long-term returns of the stock market. I fully understand the shock and awe of the 2008-2009 market collapse is still ingrained in the minds of millions of Americans, but all market indexes are now well beyond their 2007 highs now, meaning investors who stayed the course, or perhaps even bought more, came out ahead.

Source: Flickr user Celestine Chua

Historically the stock market has returned 8% per year, which is a far better return than you’re going to find by purchasing a bank CD, putting your money in a money market account, buying a U.S. Treasury bond, or putting your money under the mattress. It’s really one of the few ways you have to outpace inflation over the long run. Plus, if you add healthy dividend stocks to your portfolio and consider reinvesting your payout back into the stocks you own you could really supercharge your returns.

For example, using Bankrate‘s investment calculator I assumed an individual at age 18 could start their investment portfolio with $2,000 and add $2,500 annually, or a little less than $210 per month. Assuming a tax rate of 15%, a full retirement age of 67 (so, 49 years of work history), and an annual rate of return of 8% (note, I’m not even including dividends here), our fictitious investors would essentially have $1 million upon retirement. What’s more, if their portfolio averaged an annual yield of 2% from dividends, their $1 million could easily double to $2 million or more. That would more than likely cover your medical expenses in retirement.

Secondly, Americans need to think long term by taking advantage of tax-advantaged retirement accounts.

For America’s youth there may not be a better deal available than a Roth IRA, which currently allows for a contribution of up to $5,500 per year (persons aged 50 and up can contribute up to $6,500 annually). On the downside you’ll see no upfront tax benefit from contributing to a Roth IRA, but the back-end benefits can be astronomical since any and all capital gains and dividend payments are completely free of taxation as long as you don’t withdraw funds from your Roth IRA before age 59 1/2 for an unqualified reason.

Finally, Americans of all ages need to understand the intricacies of the Social Security program so they can maximize their benefits in retirement. For some this could mean simply waiting until age 70 to claim their benefits in order to maximize their Social Security payout. For couples it could mean a number of strategies, such as “File As a Spouse First.”

This strategy, as long as both members of the couple are of full retirement age, allows a spouse to file an application for benefits with the Social Security Administration, but restricts the application to just spousal benefits. This way the retirement benefits of the filer can continue to grow until they claim their own benefits at age 70 and they’ll get spousal income in the meantime.

Long story short, the way to maximize your Social Security benefits may not always be readily apparent, so it pays to familiarize yourself with the ins and outs of the Social Security program.