Retirement Healthcare Cost Planning & Perspectives

As pre-retirement healthcare expenses continue to rise at a faster rate than annual increases in income, the cost of healthcare services in retirement becomes a top-of-mind issue for individuals and couples who are approaching retirement age. Unfortunately, the closer one is to retirement, the more of a challenge healthcare cost funding becomes.

According to the Massachusetts Health Policy Commission, from 2000 to 2021, employee premium contributions have risen 295%, while household income increased only 88% and CPI went up by just 60%. Throughout this century, healthcare expenses have consumed larger portions of American budgets and have decrease disposable income for many.

Source: Massachusetts Health Policy Commission; June 7, 2023 Board Meeting

If an average healthy couple (48-year-old woman, 50-year-old male) have not saved for the cost of healthcare in retirement, their total national average cost would exceed $1,475,000 ($614,000 in today’s dollars) assuming the male lives to an actuarial life expectancy of 87 and the female to age 89.

Based on a growth portfolio generating a 7% average pre-retirement annual return, this couple would need to save $163,000 today to cover lifetime healthcare expenses that include premiums and all other out of pocket costs such as co-pays hearing, vision and dental. Overall, savings today required to fund healthcare range from approximately $80,000 to $170,000 based on health conditions, life expectancy, state of residence and coverage options.

It is important to note that individuals cannot “downsize” their healthcare costs. A patient that avoids medical care may actually incur a greater lifetime cost because of the progression of chronic conditions. Therefore, it is important to include healthcare costs in a traditional financial plan.

Another key issue is to be aware that healthcare costs vary by state and coverage options. For example, the cost variance of the same supplemental plan can vary close to a 50% differential based on state of residence. Additionally, healthcare inflation has historically increased close to two times CPI. So, increasing annual healthcare costs by CPI in a financial plan is unrealistic.

And like any other purchase we make, it helps to compare prices whether retired or not. When in retirement, the same supplemental policy can vary in price based on the insurance company. Additionally, whether retired or not, tests such as an MRI can vary significantly from one provider to the next. The time has come for patients to do their due diligence prior to selecting a location for services such as an MRI.

While healthcare costs are significant, proper planning can address these future expenses with achievable investments. As advisors well know, the sooner a plan is made, the less is required to fund these costs, so conversations with clients in their 40’s and 50’s can put them on the right track.