Planning for Healthcare Costs in Retirement

Planning for Healthcare Costs in Retirement



How much will you need to save?

According to recent data published by the Employee Benefits Research Institute (EBRI) the average American couple with median prescription drug expenses will need to save $265,000 in order to have a 90% probability of covering just their out-of-pocket healthcare costs (e.g., Medicare premiums, deductibles and copays, as well as dental, vision and hearing) over the course of their retirement. Please note, this figure does not include the potential costs associated with long-term care – costs that can easily exceed another $80,000/year.1

These are just a few of the reasons why so many pre-retirees and retirees point to potential future healthcare issues as their key financial concern. How much will I need to spend out-of-pocket every year? What services will Medicare pay for, and what won’t it cover? How will inflation impact costs down the road? And what steps can I take to prevent long-term care needs from wiping out a lifetime of savings? These are vital questions that you and your financial advisor here at BLB&B need to discuss and plan for since they can dramatically impact both your lifestyle and your legacy.

The impact of inflation

A basic mistake many people make is using current medical costs to estimate how much they’ll need to save to cover expenses that won’t be incurred for another 10, 20, or even 30 years. In fact, over the past thirty years, while the overall cost of living has essentially doubled due to inflation, medical costs have nearly quadrupled.2

Why such a dramatic difference? It comes down to a basic matter of supply and demand. Thanks to increasing longevity, our country’s population of seniors over age 65 is expected to increase by 40% (more than 60 million people) by 2025. Over the same period, however, there’s projected to be a 60,000+ shortage of physicians and more than a million unfilled nursing jobs.2 The supply of healthcare professionals simply can’t keep pace with growing demand.

As a result, on average, a moderately healthy 65 year-old client who’s paying about $5,000 a year in medical expenses today can expect to pay close to $10,000 a year at age 75, and nearly $25,000 a year by the time they reach age 89. Without factoring in medical cost inflation, the likelihood of putting too little aside is almost a certainty.

Integrating healthcare into your financial plan

While annual healthcare expenses will vary widely and need to be adjusted up or down depending on your age and general health, a good rule of thumb is to start with a current annual out-of-pocket healthcare cost of around $6,000/individual and then factor in an expected 7% annual inflation rate. If you plan on retiring early or anticipate having income greater than $85K in retirement, you’ll want to plan on higher healthcare expenses. Conversely, if you will receive employer-provided retiree healthcare coverage, your healthcare expenses will likely be lower.

As with any planning, the sooner you start the more options that will be available to you. Please talk with your financial advisor at BLB&B. He or she can work with you not only to estimate annual healthcare costs, but also to explore long-term care funding options, and most importantly, build all of these costs into your overall retirement income plan to help preserve your assets for a lifetime.

1Employee Benefit Research Institute, March 2017
2U.S. Bureau of Labor Statistics, November 2016 
Posted by BLBB

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