Health Costs in Retirement
- June 15, 2020
- Financial Planning, Healthcare and Medicare
According to a study by Fidelity, the average 65–year–old married couple will need $285,000 just to cover their health care costs in retirement. And, this does not include the cost of any long-term care needs.
Fortunately, health care costs are not a lump sum cost the day you retire. Those are annual line item expenses over 20 years. A Bureau of Labor Statistics Consumer Survey states the average couple spends $30,000 a year in food, clothing, and shelter in retirement. We don’t think of that as a $600,000 cost. We don’t look at income streams as lump sum assets either. We should look at health care costs in the same way – a line item expense on a yearly basis, not one lump sum.
The reality is we have repeated health care expenses year after year. Retirees go on Medicare and can purchase supplements. Those items cost money and they also don’t cover everything. A Vanguard and Mercer Health and Benefits joint study found the average annual cost of health care for an individual in retirement is $5,000 per year and a couple is $10,000 per year. Over 20 years, once you add in inflation, Fidelity determined you would spend $140,000 over 20 years. However, you pay this cost annually.
Think about how you budget this health care cost in your income and expenses each year in retirement. To do that, figure out what you are spending per year on health care prior to retirement and determine a ballpark figure to use – how much are you paying for insurance premiums and how much are you paying out-of-pocket for using that health insurance. $5,000 per person is the average for a 65-year-old on Medicare. You could be higher or lower depending on your health care needs. Take into account any chronic health conditions that could drive up the cost such as hypertension, heart disease, arthritis, dementia, cancer, osteoporosis, etc.
Ultimately, the way you plan for retirement health care costs is by including it in your line item budgeting since it is a monthly and annual expense. Build health care costs into your expenses and produce an income plan that increases over time.