Healthcare Costs in Retirement

Our Quarterly Market Commentary has been delayed by a week as we are still analyzing some new market trends that we intend to write about.  In the meantime, let’s talk about healthcare.

I can’t think of any expenditure that gives retirees less enjoyment than medical expenses. It is tempting to go into a rant about the sad state of healthcare costs, customer service, and overall dysfunction of the industry. Instead, I will exercise some self-control and stay focused on today’s topic, which is budgeting for healthcare costs in retirement.

Many pre-retirees are not sure how their medical expenses will change once they are eligible for Medicare at age 65. Medicare part A covers hospitalization and is free to anyone who has earned Social Security benefits. There is a monthly premium for part B, which covers doctors’ visits and most tests. The premium will be $134 per month in 2017 for new enrollees, but only around $109 for seniors who have been on the program. Most people do not even notice the monthly premium because it is automatically deducted from their Social Security payments, assuming they are already collecting benefits.

This would be a very short article if the only healthcare expenses were the Medicare, part B premiums. Sadly, there are a whole host of other expenses such as deductibles and co-pays (many people buy insurance to cover these), Medicare’s part D (prescription drug coverage), and vision and dental expenses, which are not covered at all by Medicare. Click this link for 2016-2017 Medicare costs and coverage details.

So, how much will the average 65-year-old couple spend on healthcare over the course of their retirement? The answer, according to Fidelity, is $260,000! Yikes! For that amount, they should name a clinic after you. I tried to find other estimates that were lower, but most other estimates I found were actually higher, such as those found in this 2015 Retirement Healthcare Costs Data Report.

That $260,000 includes your premiums for Medicare parts B and D, which account for about a third of your total retirement healthcare expenses. The remaining two thirds comes from deductibles, co-pays, and medical services that are not covered by Medicare. Long-term care expenses are also not included in the $260,000 figure. I would recommend budgeting approximately $5,000 – $7,000 per person per year beginning at age 65, depending on your health and family history. The break down may look something like this:

Medicare, Part B (premiums) $1,608
Medicare, Part D (premiums) $582
Medigap Policy $2,322
Out of Pocket $1,860
Total $6,372

Here is a very simple healthcare cost estimator, if you want to see an appropriate budget range for your current age and health.

Inflation is an issue for all items in your retirement budget, but healthcare costs are likely to rise much faster than other categories. Healthcare costs have increased at an average of 6% per year over the past 50 years. The centers for Medicare and Medicaid, as well as other healthcare actuaries, expect healthcare costs to continue to increase at 4-7% per year for the foreseeable future.

Keep in mind that all of the figures are estimates and averages. Your healthcare costs could vary considerably. You may live to 100 and never go to a doctor, whereas your neighbor could live to 80 and spend much more than you on healthcare. There is no sense in worrying, just get plenty of exercise, avoid stress, and go out and enjoy your retirement!

Jeremy A. Kisner, CFP®, CPWA® is a Senior Wealth Advisor at Surevest Wealth Management and author of book: A Good Financial Adviser Will Tell You.
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