Healthcare costs in retirement

KEY CONSIDERATIONS

• What healthcare costs will I have in retirement? 
• What is the role of Medicare?
• How can I plan to be prepared for my healthcare costs during retirement?

As you think about and plan your retirement you are likely aware that healthcare costs are one of the biggest expenses to consider. However, itis easy to be confused, overwhelmed, or simply not know exactly how to think about these expenses to prepare adequately. While most people are aware that health care premiums, medications, and the possibility of needing long-term care necessitate careful planning, recent studies have shown that most people underestimate both the amount of money they need to have saved and the degree of risk they face in health matters, and/or because of likely increased longevity.  

For this reason, learning to accurately identify risks, while learning from the perspective of experienced financial professionals, and using the most recent data is an essential part of the most strategic and supportive retirement planning. Doing so now will help you feel confident and prepared for all the phases of your life and retirement—through health, illness, and everything in between. 

Medicare

A good place to start thinking about healthcare costs is with a basic understanding of Medicare. Medicare is the federal government’s health insurance program for everyone age 65 and up. Today, 9 out of 10 people aged 50 and up are currently enrolled, or plan to enroll in Medicare. Medicare is a crucial source of healthcare coverage, but it is not always well understood. While it covers a great deal of necessary health care costs, you should be prepared that even when fully covered, you will be responsible for certain premiums and out of pocket expenses.

Medicare refers to a set of different component parts, each of which corresponds with a different facet of health care.

Part A, Hospital insurance: This covers in-patient hospital stays, hospice care, some home health care, and care in a skilled nursing facility. If you have paid taxes for more than 10 years most likely part A will not require any premiums or extra spending. For the relatively few people who do not qualify for Part A, it is possible to purchase it for a variable monthly premium based on how long you paid taxes. 

Part B, Medical Insurance: Includes "certain doctors' services, outpatient care, medical supplies, and preventive services." Part B does require a fixed monthly premium for all, which varies based on reported income. 

Part D, Prescription Drug Coverage: This involves joining a Medicare-approved plan which includes prescription drug coverage with varied monthly premiums. While plans vary Medicare ensures a standard level of coverage. 

It’s important to note that enrollment in Medicare Parts A and B is automatic, but Part D must be enrolled in separately. Medicare also includes Part C, or Medicare Advantage Plans which are typically provided by private insurers and bundle together Parts A, B, and D. Medicare Advantage plans may also offer coverage for routine dental, vision, and hearing care which are not always covered by traditional Medicare. Besides Medicare Advantage plans, Medigap is another separate offering meant to provide supplemental coverage for charges not covered by Medicare. Like Medicare Advantage it is offered through private approved companies, but unlike MA it usually doesn’t cover dental, vision, hearing, or long-term care. 

Projected Healthcare Costs

Medicare provides necessary coverage for many millions of Americans, but in understanding the program it becomes clear that it is not fully comprehensive in terms of many peoples’ long-term needs. Additionally, given trends in healthcare costs, inflation overall, and the solvency of Medicare as a program in the long-term it’s essential to develop the broader picture of likely spending over time. 

A good starting place for planning for your own future is to look at current statistics for average healthcare cost projections. The Employee Benefit Research Institute (EBRI) publishes a yearly analysis of health care spending projections over time. It takes into consideration trends in costs, inflation, and employment-based retirement programs to create estimated projections to help individuals and couples better plan for likely healthcare-related costs. The EBRI 2022 report found that "predicted saving targets for Medicare beneficiaries to cover health premiums, deductibles, and certain other health expenses in retirement increased between 3 and 8 percent in 2021." These increases are some of the highest in a decade. Assuming a median expenditure on prescription drugs, a 65-year-old couple would need $296,000.00 in savings to have a 90% chance of being able to pay for all needed costs—up 10% from 2020. For individuals, again assuming median prescription drug expenditure, a 65-year-old man would need $142,000.00 and a 65-year-old woman would need $159,000.00.

These are of course average and the extremes can vary a great deal. For a couple in the 90th percentile of prescription drug expenditures—which may include things like cancer treatment or experimental drugs for chronic conditions—an estimated targeted savings of $361,000.00 could be needed. 

No one could blame you for being overwhelmed by these numbers and it’s true that there are often large gaps between projected spending estimates and what most people have saved for retirement currently. This is especially evident when differences in gender are considered—one analysis found that in the US women’s average retirement savings is $57,000.00 compared to $118,000.00 for men. When broken down by household, average savings for a few different age demographics provide a somewhat different picture:

45-54: $254,720.00
55-64: $408,420.00
65-74: $426,070.00 

Supplemental Options

In addition to Medicare, you might consider a Health Savings Account (HSA). Typically offered by employers and sometimes by banks, an HSA allows you to set aside money pre-tax specifically for healthcare costs like copays, deductibles, and coinsurance (though usually not for premiums). One thing to note though is that HSAs are generally only available to those enrolled in High Deductible Health Plans. Check with your employer’s HR and Benefits team to learn more about these options or consult with a financial professional.  

Long-term Care insurance is another option for planning for potential needed long term care. While Medicare covers hospital stays and some nursing home or in-home care, LTC insurance can provide additional funds for any treatment not covered. Sometimes LTC insurance is offered in hybrid plans which may also include life insurance or an annuity—both sources of additional financial support for you and/or your spouse or partner.  An experienced financial professional can guide you through the various options and help you create an individualized plan. 

New Ways of Thinking About Healthcare Costs 

It’s normal to be a little overwhelmed in thinking through all these options and possibilities. However, new ways of thinking and planning can help break things down into more manageable pieces. Perhaps the biggest is to differentiate between fixed healthcare costs like monthly premiums, policy deductibles, and current medications and variable or unknown costs such as future illness, injury, or need for more intensive care down the road. In doing this and working with an experienced financial planner, you will likely be able to estimate your average yearly healthcare expenditures so that you can track that amount in the context of your other retirement investments and savings. 

With an understanding of these mostly set healthcare cost you can think differently about how to plan for the unknown expenses. There are several strategies to help you allocate funds for potential high-cost health events later in life. 


Of course, one of the best ways you can plan for healthcare costs in the long-term is to be proactive about your health—physical and mental—right now. Some things you might consider incorporating into your lifestyle now include:

• Establishing healthy eating and exercise habits. If you haven’t already, there’s no better time to incorporate smart diet choices and more physical activity in your day-today—two of the most powerful preventative actions to ensure long-term wellness. 
• Check in with your health care providers about any concerns and enlist their support in building routines and habits that support both mind and body now. 
• Build your community. Connect with friends and family to ensure strong relationships and networks of mutual support. 

By strengthening your mental and physical health, alongside conscientious and informed financial planning, you will foster more holistic overall wellness leading up to and into retirement. Feeling confident in your financial resources and how they are set up to provide for future needs will ease mental and emotional stress. At the same time caring for your mental, emotional, and physical well-being now, can help prevent illness or injury that could cause financial strain later. 

Developing this holistic view of retirement and healthcare planning involves considering different aspects and possibilities of the future, while staying active and engaged in the present. The tools and strategies you need to retire with confidence are available to you and can be best accessed and utilized with the guidance of an experienced financial professional. Whether you are well on your way in your retirement journey, or just beginning the process, don’t let big numbers, or feeling overwhelmed stop you from imagining the retirement of your dreams.