Financial Planning

The Cost of Healthcare in Retirement Keeps Rising. These Tips Will Help You Prepare

By  Opher Ganel

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Healthcare costs in retirement have doubled in the past 20-odd years, reaching $158k per retiree. And while that’s unchanged from last year, the upward march of this cost will likely restart soon. Learn what you can do now to improve your position to cover the fast-rising cost of healthcare in retirement.

A year ago, Dave Coker wrote why the Consumer Price Index (CPI) is a lie. He made excellent points, and the increase in retiree healthcare costs over the past 20-odd years is a perfect example.

How Fast Do Healthcare Costs Grow?

Healthcare comprises 8.1% percent of the CPI. That sounds plausible, right?

For whom?

Not for the elderly.

As you’ll see below, healthcare costs in retirement can grow from 15 percent to nearly 50 percent of your budget, increasing their weight in your “personal CPI” to nearly 6× higher than for the general population!

If healthcare prices went up at the same (or lower) rate as the rest of the CPI’s basket, this wouldn’t be an issue.

But history shows us the opposite.

Since 2002, overall CPI inflation was 69 percent – a 2.53 percent annual rate. Healthcare costs in the same period doubled – a 3.36 percent annual rate.

This translates to costs going up for the elderly far faster than for the rest of us, but Social Security still uses the CPI-W to calculate Cost-of-Living-Adjustments (COLAs), which underestimate retiree cost increases by about 0.3 percent a year compared to the CPI-E that looks at a basket of goods the elderly are more likely to buy.

That may not sound like a lot, but over a 20-year retirement, your benefits will lag your expenses by about 5.5 percent.

Retiree Healthcare Costs Are High and Will Only Go Higher

According to a report from RBC Wealth Management:

  • 80 percent of the 1000 Americans surveyed are concerned about the fast-rising cost of healthcare.
  • This concern should be greater, given the fact that the $2700 average those surveyed expect to spend annually on healthcare in retirement is 44 percent of the $6100 per person actual expense.
  • As our population grays, the demand for healthcare grows, but the supply of healthcare professionals will suffer as the Baby Boom generation retires, placing upward pressure on healthcare costs.
  • Increasing life spans mean each retiree will need to cover ever-increasing healthcare costs for longer.
  • For retirees ages 65-74, annual healthcare costs average $6k, growing to $10.5k for ages 75-84, and $19k for those 85 and older.
  • By age 65, healthcare comprises over 15 percent of your spending; the above numbers imply this may grow to over 25 percent by age 75 and nearly 48 percent by age 85.

Two other issues many don’t consider are (1) Medicare doesn’t cover dental costs, which can be significant, and (2) if you retire before you’re eligible for Medicare (at age 65), you’ll have to pay for private health insurance during that gap (and on average, Americans end up retiring more than four years earlier than they planned or expected).

You may qualify for your employer’s health insurance after you leave employment under the Consolidated Omnibus Budget Reconciliation Act (COBRA). However, while most employers heavily subsidize the cost of health insurance for active employees (an average of 70 percent of costs), very few employers do the same for retirees.

When I left my last position as an employee, I purchased COBRA coverage, which pushed my premiums up from $300 a month to $1500! Spending an extra $1200 a month when my income was gone was very stressful, to say the least.

Fidelity Report: Retirement Healthcare Costs $157.5k per Person

Fidelity just released their 22nd annual report on retiree healthcare costs.

In the report, they say, “A 65-Year-Old Retiring Today Could Spend $157,500 on Health Care, even with Medicare Coverage.” 

This is flat relative to their 2022 figure, but they believe the reprieve is likely to be temporary, saying “…limits on how much retirees can spend on prescriptions covered by Medicare Part D from the Inflation Reduction Act are likely to temporarily offset the overall inflationary trend of health care costs for retirees” (my emphasis).

What Impacts Your Personal Healthcare Costs in Retirement?

A Vanguard report offers insights, pointing out 6 factors affecting a retiree’s personal annual healthcare costs:

  1. Your Health Status: if you’re at low health risk (e.g., nonsmoker with no chronic conditions) you may expect to spend as little as $3.4k a year. If you’re at medium risk, that increases to an average of $3.9k. At high risk (e.g., smoker and/or have two or more chronic conditions), expect to spend an average of $7.5k a year.
  2. Your Medicare Choice: If you choose to buy a Medicare Advantage plan, you’ll spend more on premiums but likely less on out-of-pocket costs than those who buy a traditional Medicare plan.
  3. Employer Subsidies: The higher your employer’s subsidy for health insurance premiums, the bigger the financial hit you’ll suffer when you retire (unless you’re one of the fortunate whose employers extend health insurance benefits to their retirees). This can be over $5k a year.
  4. Age at Retirement: As mentioned above, if you retire before age 65, you’ll spend a lot to cover the gap until you’re eligible for Medicare. The average difference is $7.6k a year if you’re 64.
  5. Where You Retire: The average cost of Medigap plans depends on where you live in retirement. The lowest costs are in Alaska, California, and New Mexico; while the highest are in Washington State, North Dakota, Missouri, Rhode Island, and some areas of Pennsylvania and New York State.
  6. Your Retirement Income: If your income in retirement is “too high,” your Medicare premiums will increase.

What You Can (and Should) Do to Address High Healthcare Costs in Retirement

While none of us can prevent healthcare costs from increasing, there are things we can and should do to help us cope.

1. Lifestyle Choices

Crucially, make better lifestyle choices throughout your life. Maintain a healthier body weight, get enough sleep, keep your alcohol consumption (if any) reasonable, avoid smoking, etc. All these will improve your health in your later years. 

Waiting until the proverbial chickens come home to roost to make these changes is too late. Get this one step right, and you could save yourself lots of (financial and non-financial) suffering. 

Even better, not only does this not cost you money, it can save you a bundle on tobacco and alcoholic beverages. The average smoker suffers a lifetime cost of more than $1.6 million (cost of tobacco products, loss of investment returns, increased healthcare costs, loss of wages, etc.), while the average annual amount spent on alcohol in metro areas ranged from over $500 to over $1200.

2. Health Savings Accounts (HSAs)

When you’re young and healthy, consider buying HSA-compliant, high-deductible health insurance coverage. Then, take advantage of HSAs that let you invest your contributions in mutual funds (I use Optum Bank’s HSA), and don’t use them to offset healthcare costs during your working years, letting the accounts grow ever bigger. 

These accounts enjoy a triple tax advantage – you deduct contributions in the year you make them, earnings grow without taxation, and every dollar you withdraw to cover healthcare costs is tax-free.

3. Long-Term Care (LTC) Insurance

Consider purchasing long-term-care insurance to avoid catastrophic losses if you suffer a devastating condition that requires such care for many years.

4. Delaying Retirement

Consider working one or more years longer to take advantage of low-cost employer health insurance plans. This will also let you continue to build up your retirement plan balances, let money already invested continue growing, and avoid drawing any money out of those plans.

5. Enroll in Medicare on Time and Make the Best Choices for You

When you get close to age 65, it’s time to look at Medicare in detail and choose which plan(s) you want to sign up for. Your initial enrollment period starts three months before you turn 65 and closes four months after that birthday. Make sure you sign up on time or you could suffer lifetime late-enrollment penalties.

If you’re still employed when you turn 65 and get health insurance through your employer, you can take advantage of a “Special Enrollment Period” when you leave employment.

Cait Howerton, MBA, CFP®, Associate Planner, Archer Investment Management, observes, “Retirees are often fearful of ‘messing anything up’ with their healthcare benefits. As a result, they don’t shop around for more comprehensive or less expensive Medicare Advantage, Part D, and Medigap policies. I recommend retirees work with their Financial Planner or their State Health Insurance Assistance Program to review their coverage options to reduce annual healthcare costs.”

Jorey Bernstein, Executive Director, Wealth Manager, and Founder, Bernstein Investment Consultants advises his clients to follow the above steps, saying “Last year, we helped a client manage his retirement healthcare costs by analyzing his health status, Medicare plan, employer subsidies, age at retirement, location of retirement, and retirement income. Based on our analysis, we recommended he delay retirement to take advantage of his employer’s health insurance plan and enroll in Medicare on time. We also suggested he consider purchasing long-term care insurance and making better lifestyle choices to mitigate healthcare costs in retirement. By taking these proactive steps, our client was able to better prepare for the rising cost of healthcare in retirement and ensure that healthcare expenses didn’t significantly impact his retirement income.”

The Bottom Line

Healthcare costs in retirement have doubled in the past 20-odd years, reaching $157.5k per retiree. And while that’s unchanged from last year, the upward march of this cost will likely restart soon.

While retiree healthcare costs are very high for many, Kevin Estes, Founder & Financial Planner, Scaled Finance, notes that for some, healthcare costs can be much lower than they expect, “Pre-retirees often overestimate future healthcare premiums – sometimes by an order of magnitude. The Affordable Care Act created health insurance exchanges that base premium subsidies on income, not assets. Lower income often qualifies early retirees for subsidies that may lower premiums well below those of COBRA continuation coverage. For more detail on premiums in your area, check out HealthCare.gov.”

It may feel like an impossible task to plan for healthcare costs, especially since they can vary so hugely depending on your health and other hard-to-anticipate factors. However, a T. Rowe Price report offers a new way to calculate retirement healthcare costs.

The gist of the report is that it’s easier to plan for retiree healthcare expenses by looking at costs on an annual basis rather than as a lifetime lump sum and to separate predictable premium costs that should be included in your budget vs. unpredictable out-of-pocket costs that will likely need to be covered from your emergency fund or other savings.

This article offers 5 things to do, many of which don’t cost money (or even save you a lot), that will put you in a far better position to cover the high and fast-rising cost of healthcare in retirement.

What steps have you taken to lower the cost of healthcare in retirement?

Disclaimer: This article is intended for informational purposes only and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

About the Author

Opher Ganel

My career has had many unpredictable twists and turns. An MSc in theoretical physics, a PhD in experimental high-energy physics, a postdoc in particle detector R&D, a research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started several other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. I draw on these diverse experiences to write about personal and small-business finance to help people achieve their personal and business finance goals.

Follow me on Medium (opher-ganel.medium.com).

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This article originally appeared on Wealthtender. To make Wealthtender free for our readers, we earn money from advertisers, including financial professionals and firms that pay to be featured. This creates a natural conflict of interest when we favor their promotion over others. Wealthtender is not a client of these financial services providers.

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Disclaimer: This article is intended for informational purposes only and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

To make Wealthtender free for readers, we earn money from advertisers, including financial professionals and firms that pay to be featured. This creates a conflict of interest when we favor their promotion over others. Learn more. Wealthtender is not a client of these financial services providers.
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