HEALTH CARE COSTS IN RETIREMENT
few years ago, my mom, who is now 90, asked me for help tracking her health care costs. The process of matching Medicare claims to payments had become too much for her, and she wanted out. I don’t blame her. Why spend your time puzzling over paperwork when you could be reading novels and rooting for your beloved football team?
Going over her monthly costs has been an eye-opener. First, it brings home that Medicare and supplemental coverage are neither free nor particularly cheap (contrary to what many people believe). My mom pays $3,381 a year in premiums for Medicare, medigap, prescription-drug coverage and dental and vision insurance. Copayments and deductibles add another $1,350 or so a year.
Still, Mom’s costs for medical care are manageable on a middle-class income and, surprisingly, they haven’t gone up much over the years. That’s true for most people, according to a February 2015 report by the Employee Benefit Research Institute. Recurring costs for doctor visits, dental care and prescription drugs are relatively stable (albeit not insignificant) throughout old age. It’s a different story for nonrecurring costs; you’re more likely to need hospital, home health and nursing home care as you age, bringing much higher expenses.
Two types of costs. The beauty of this report, by Sudipto Banerjee, is that it breaks health care costs into two categories, the predictable and the unpredictable, whereas some other studies lump the costs together. Fidelity Investments recently estimated that retirement health costs, excluding long-term care, will total $245,000 for a couple who are each 65 and live to their average life expectancies — 85 for a man, 87 for a woman. In an October 2015 report, EBRI estimated that a couple who are each 65 with median drug expenses would likely need $264,000 for their health costs.
But even the researchers who crunched these numbers acknowledge that they’re more a wake-up call than a precise action plan. For one thing, if you’re saving for retirement at all, you’re already saving for health care costs, and you certainly don’t need the whole amount on Day 1 of retirement. For another, big-picture health care estimates are, as with any prediction, uncertain. “You don’t know what new technology is around the corner, or what medication is going to be available as a generic or over the counter,” says Paul Fronstin, one of the authors of the October EBRI report. Finally, global numbers don’t factor in your specific circumstances, including your health, life expectancy and even your location, all of which play a role in your own health cost estimate.
So how do you predict your own retirement health costs? As you close in on your retirement date, assess what you’re spending for recurring expenses, such as visits to the doctor and dentist and prescription drugs. Calculate premiums and deductibles for Medicare Part B (for doctor visits and outpatient care), as well as for supplemental insurance such as Part D for prescription drugs and medigap to protect against unlimited out-ofpocket expenses. (To compare costs in your area, use the Medicare Plan Finder, at www.medicare. gov/find-a-plan.) Factor in health care inflation (ask a financial planner for help running the numbers). Then identify how you’ll pay for these recurring expenses — say, from Social Security, pensions or an annuity.
Make separate provisions for unpredictable expenses by setting aside savings (ideally in a health savings account), purchasing a long-term-care insurance policy or setting up a home-equity line of credit. You may never have to tap those resources, but if you do need them, you’ll be ready.