facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog search brokercheck brokercheck

Medical Expenses in Retirement

Outliving your money is one of the greatest fears of individuals and couples planning for retirement.  This is largely driven by uncertainty around medical expenses.  Medical expenses will represent one of your largest expenses after housing and transportation.  Fidelity’s Financial Solutions Group estimates that about 15% of the average retiree’s annual expenses will be used for health care expenses, including Medicare premiums and out of pocket expenses.  According to the Kaiser Family Foundation, the percentage of household budgets spent on health expenses is nearly 3 times as much for retirees on Medicare as for working households (14% vs. 5%).

Fidelity estimates that the average couple age 65 in 2019 will need $285,000 in today’s dollars for medical expenses in retirement, not including long term care.   The Employee Benefit Research Institute found that a couple, age 65, would need $265,000 to attain a 90% chance of covering their medical expenses.

Lump sum estimates are informative but understanding annual expenses is more useful in planning for retirement. A model developed by Vanguard in partnership with Mercer Health and Benefits considered costs as annual expenses based on an individual’s personalized health status, coverage choices and retirement age.   For a typical woman age 65, the Mercer-Vanguard model predicts annual health care expenses of $5,200 in 2018, if purchasing a Medicare Supplemental Plan F and a standard prescription drug plan.  This increases to $7,900 at age 75 and $13,900 by age 85.  The Mercer-Vanguard model focused on women but found the variation between men and women was only 2%.

Retirees spend more on medical expenses as they age.  The need for medical services increases as we grow older and inflation on medical services is greater than inflation on the consumer price index, which is about 2.6%.   Mercer found that medical expenses for retirees increased by an annual rate of 5.6% in 2018 but should trend down to an annual rate of 4.3% by 2091.

Several key factors contribute to your medical costs in retirement.  When projecting your retirement expenses, adjust the average annual medical costs to reflect your individual situation.   These include health status, coverage choices, when and where you retire, how long you live and income.  Annual premiums on Medicare Part B and D range from $1,608 to $5,143 depending on income, due to government subsidies.

The most significant factor is the status of your health.  Individuals with chronic medical conditions utilize the most care.  High risk individuals, those who smoke, visit the doctor frequently, or have two or more chronic conditions may experience expenses that are 90% higher than average.  However, low risk individuals, generally those free of chronic conditions, can expect costs about 15% lower than average.

As you progress through retirement, medical expenses may become a significant portion of your budget.  Fortunately, at the time when medical expenses are accelerating, you will spend less in other areas.  As we age, our spending on housing, entertainment, transportation and travel decreases.