Plan now for medical costs in retirement
They could average more than $100K, analysts say
Medicare pays for many of the health care costs incurred by older Americans, but it doesn’t cover everything.
This creates a financial-planning problem: How much should a person expect to pay in out-of-pocket health-related expenses during retirement?
The bad news is that several recent studies warn that Americans, on average, should plan on spending much more than $100,000 in out-of-pocket medical costs during retirement.
The good news (or at least better news) is that the challenge isn’t so overwhelming if you break down the projected expenses into a smaller annual figure and prepare for it.
❚ Study takes different approach: In a report released in June, the Vanguard Group, with help from Mercer Health & Benefits, projected a typical woman could easily face $200,000 in out-ofpocket medical costs starting at age 65 and extending over her remaining estimated lifespan of 24 years. (Costs are roughly 2 percent less for men, partly because they tend not to live as long.) That projection doesn’t include food, housing and other routine expenses – just medical outlays.
But the report instead encouraged people to focus on these costs as an annual expense, not as a lump sum.
It estimated that the same hypothetical woman would spend about $5,200 in annual health expenses in the first year, at age 65, rising gradually after that with inflation. That’s a more reasonable number – a lower figure that might encourage more people to view the challenge as achievable.
That annual figure encompasses most medical expenses retirees would face. But it doesn’t include long-term care, which could run tens of thousands of dollars for some retirees or nothing at all for others.
❚ Planning for yearly expenses: At any rate, $5,200 sounds a lot better than
$200,000. Multiyear lump-sum projec- tions are fairly unusual anyway, as people tend to think more in annual costs when making decisions.
In a similar vein, the Vanguard/Mercer report explained that single-person households in retirement spend about $16,900 a year on average for food, clothing and shelter (excluding medical expenses), citing numbers from the Bureau of Labor Statistics.
Yet that $16,900 estimate, projected over a 24-year retirement stretch and without factoring in inflation, would jump to more than $400,000.
Larger lump-sum numbers could become “behaviorally distracting,” the report stated, meaning people could become so discouraged about saving that much money that they throw in the towel before trying.
❚ Effect of personal circumstances: It’s important to recognize the various cost estimates are broad. While the Vanguard/Mercer report projected a baseline $5,200 annual cost for a 65-yearold woman, likely yearly expenses could vary from as little as $3,000 to more than $26,000.
Personal health and other factors can push the numbers higher or lower. So can factors such as changing prices for prescription drugs.
It’s worth remembering that for people who retire early, big medical outlays may begin before age 65, when Medicare eligibility begins. Some early retir- ees could have access to subsidized medical insurance through work that covers most health costs.
Alternatively, nonworking individuals can obtain private insurance on their own. Regardless, people who retire before 65 “need to have a strategy to bridge their health care coverage between retirement and Medicare,” according to the study.
Then there’s long-term care. Planning for these expenses are difficult because, while about half of seniors will require paid care, others might not need to spend much, if anything.
The Vanguard/Mercer report recommends people consider a range of resources to pay for long-term care, including personal savings and the equity in their homes. Long-term-care insurance, while expensive and difficult to qualify for, might be another option.
Personal health and other factors can push the numbers higher or lower.