According to a new report by Milliman, a healthy 65-year-old couple retiring in 2020 is projected to spend approximately $351,000 in today’s dollars ($535,000 in future dollars) on healthcare over their lifetime, down from a $369,000 projection in the 2019 report.
And a healthy 45-year-old couple is projected to spend approximately $505,000 in today’s dollars ($1.4 million in future dollars) on healthcare over their lifetime, down from $532,000 in the 2019 report.
While the cost projections have gone down from last year, these lofty figures nevertheless ought to be a reality check for 401k participants who might want to think about bumping up their deferral rate and/or starting or maxing-out a health savings account (HSA).
Milliman produces estimates of retiree health costs that are updated each year, developed for the purpose of educating employees and retirees about the potential cost of retiree health care.
The projected costs were calculated using the following assumptions:
- The health statuses of the retiree and spouse are assumed to be average for the entire life span of each person. These averages are based on a typical commercially insured population in the Milliman Health Cost Guidelines.
- The retiree and spouse are assumed to be male and female with life spans of 88 and 90, respectively.
- Nationwide average premiums and out-of-pocket expenses from age 65 through life span for a Medicare Supplement Plan G and a standard Medicare Part D plan are used, based on the Milliman Health Cost Guidelines and premium information obtained from the Centers for Medicare and Medicaid Services (CMS).
- Future medical trend is assumed to be 4.9% per year. This assumption is based on long-term estimates from a Society of Actuaries model, supplemented with Milliman research and converted to an annual equivalent rate.
- For calculations of present values in today’s dollars, an investment return of 3.0% per year is used.
Other findings from the 2020 whitepaper include:
- A healthy 67-year-old retired couple is projected to spend 34% of their Social Security benefit on healthcare in 2020 (compared to 39% projected in 2019).
- The estimated 2020 annual health insurance premium plus out-of-pocket cost for a healthy 65-year-old is $4,700 (compared to $5,000 projected in 2019).
- Expenses at age 85 are estimated to be 234% higher than that at age 65 (compared to 250% higher projected in 2019).
The information contained in the report, authored by Milliman principal and consulting actuary Robert Schmidt and associate actuary Eric Walters, was prepared for Milliman to use in a retirement planning tool for retirement savings plan participants. The cost estimates do not include the projected impact of COVID-19 on premiums and out-of-pocket costs.
The report notes that projection of retiree healthcare costs is a complicated exercise, and actual results will vary from projections for a variety of reasons, including changes in rules and regulations, market forces impacting health care costs, changes in health status and external shocks such as epidemics or trends in new diseases.