The average healthy 65-year-old couple retiring this year will need $387,644 in today’s dollars just to cover lifetime health care costs.
A just-released white paper from HealthView Services, Why Health Needs to Be Part of Retirement Planning, provides new data detailing the projected cost of health care, the impact of health conditions, and strategies to plan for, manage, and even reduce health care costs in retirement.
Total lifetime costs that make up that $387,644 figure include premiums for Medicare Parts B and D, dental, and supplemental insurance, as well as all out-of-pocket, outlays for medical, dental, hearing and vision.
The paper notes costs will be significantly higher at the end of retirement rather than at the beginning. In 20 years, the couple can expect to pay $34,268 in future dollars for one year of health-related expenses. This excludes long-term care costs.
Driven by health care inflation, projected to be 4.41%, health-related expenses for today’s 40- and 50-year-olds will be even higher.
Longer life equals higher health care costs
The report shows projected annual health care costs for healthy Americans will, on average, be lower than those of their counterparts with health conditions. But, because they are expected to live longer, the lifetime health care costs they need to plan for will be higher.
A healthy 55-year-old woman living to her actuarial longevity of 89 will need to plan, on average, for $424,875 (future value) in lifetime health care costs. If she has Type 2 Diabetes, her actuarial longevity will be 80 and her projected total costs would be far lower at $266,163.
Since health care costs will be the highest at the end of retirement, living longer than actuarial averages will significantly increase expenses. For a 45-year-old couple, living two years beyond their projected longevity of 87 (male) and 90 (female) will add $172,273 in future dollars to their health care bill.
Improved health can boost retirement savings
“Americans are not powerless when it comes to planning for future health care costs,” said Ron Mastrogiovanni, CEO of HealthView Services and HealthyCapital. “Taking steps to improve health can reduce annual medical expenses. Investing these savings, increasing contributions to retirement plans, and working with an advisor to optimize product selection with health care in mind can significantly reduce this retirement burden.”
The paper details how simple behavioral changes, including taking medication as prescribed and reducing salt intake, would enable a 45-year-old man with high blood pressure to lower his annual pre-retirement health care costs by an average of $3,651. Assuming a 6% rate of return, if he invested these savings, he’d be able to increase his retirement assets at age 65 by more than $110,000, while extending his actuarial longevity by more than two years.
Financial choices, both savings and investments, also make a difference. The report highlights the importance of investing to generate cash flow through retirement to match rising health care expenses. It outlines product choices, including using HSAs, Roth 401ks, Roth IRAs, and specific types of insurance products and annuities that can reduce the impact of Medicare surcharges.
The paper shows that by taking advantage of the benefits of compounding returns, the ongoing savings or lump sum investments required to address future health care needs are achievable.
A 50-year-old man who has not saved for health care, would need to put aside $7,129 a year, before retirement at age 65, to cover his future Medicare B and D and supplemental insurance (Plan G) premiums. Or, he could contribute an additional $183 every two weeks to his 401k, assuming a 6% return with a 50% company match, to cover these future premiums.
Need to increase retirement savings evident
Individuals on track to meet the industry’s standard 80% income replacement ratio target are addressing a portion of their future health care needs. But, the paper notes, they will need to increase contributions for health care to avoid falling short on their planning goals.
This is because when working they only had to pay for approximately 25% of their premiums, with their companies making up the difference. In retirement, they will have to pay for 100% of premiums.
Additional bi-weekly contributions required to close the gap between what they have saved and actual future health care expenses would be $120 for a 50-year-old man.
“Health care must be incorporated into the retirement planning process, and not simply because it is a significant expense that all Americans will face,” added Mastrogiovanni. “Costs must be understood and managed within the context of existing savings, health conditions, Social Security benefits, investment choices, and other retirement factors so working Americans can generate enough income to cover future health care needs.”
HealthView Services drew upon 530 million health care cases, actuarial, government and economic data to project retirement health care costs. The firm’s bottom-up approach integrates specific variables—including health status, age, gender, income, and state of residence—that will drive future health care costs. The final calculations drew upon, and are consistent with, government health care inflation forecasts.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
