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The High Cost of Healthcare In Retirement

by | Feb 22, 2019 | Retirement

Last week I talked about using Health Savings Accounts (HSAs) as another form of retirement savings account. The reason is that HSAs enjoy a “triple-tax” advantage that other accounts don’t enjoy.

The question is: How can you figure out your healthcare costs in retirement? The honest answer is that it’s difficult to pin down an exact dollar amount for a cost as uncertain as healthcare. But there are 3 factors you should be thinking about when trying to “size” your retirement healthcare costs.

The Challenge of Healthcare Costs in Retirement

Estimating your future healthcare costs is one of the most challenging aspects of retirement planning. Not only do we not know what our future health will be, but the cost of healthcare is also uncertain. All we know is that healthcare costs continue to go up!

This chart from Vanguard is a perfect example of this issue. It looks at the expected annual healthcare costs for an individual depending on their health risks (low, medium, high.)

Two things you’ll notice.

  1. Median healthcare costs for a high-risk individual are more than 2x that of someone with low health risks.
  2. The range of potential healthcare costs rises as your health risk increases.

To be honest with you, estimating future healthcare costs is as much an art as it is a science. That doesn’t mean you should ignore the issue.

I like to tell people to prepare for the worst and hope for the best. Healthcare costs in retirement are a perfect example of this.

These are the 3 things you should think about when figuring out your retirement healthcare costs.

Factor #1: Your Health and Family’s Health History

As the chart above demonstrated, one of the factors in determining your future healthcare costs is your health today. Look not just at your own health. But also that of your blood relatives, particularly parents and grandparents.

Do you have any chronic health issues? Examples are high cholesterol, diabetes, cancer, asthma, or osteoporosis.

There was a study done several years ago by the Centers for Medicare & Medicaid Services. It looked at the frequency with which elderly people experience chronic health conditions. One surprising conclusion to me is that women tend to have more chronic conditions than men.

The issue is that the cost of care for chronic conditions is high. The chart below shows how much costs escalate depending on how many chronic conditions a person has.

As the study concludes, about 70% of men and women have 2 or more chronic conditions over the age of 65. The more conditions one suffers from, the higher the cost of their care.

My Recommendation: take a hard look at your health and any chronic conditions you have. Also, take a look at chronic conditions your blood relatives have suffered from. If you suffer from a chronic condition, it’s best to err on the high side when estimating your future healthcare costs in retirement.

Factor #2: Life Expectancy

Life expectancy influences your future healthcare costs more directly. The longer you live, the more years you’d have to save for. If you’re expecting to spend $X per year on healthcare, then the longer you live the more money you will need.

The math is actually more complicated than that. This is because your annual healthcare costs go up as you get older. The chart below is from a 2018 study conducted by Vanguard and Mercer Consulting. It shows that as you age, your annual healthcare costs rise.

Here’s the funny thing with life expectancy. The longer you live, the greater your chance of living past your life expectancy. For example, life expectancy for women in the United States is approximately 78.5 years. But if a healthy woman makes it to Age 65, there is a 50% chance she’ll live for another 24 years to Age 89!

My Recommendation: Look at your family history to see how long your family tends to live. If you expect to live a long time, you’ll want to save more for your healthcare costs in retirement.

Factor #3: Long-term Care

There is arguably no greater – or scary – challenge in estimating future healthcare costs than the issue of long-term care (LTC). Long-term care is care that’s more intensive than a visit to the doctor. Common types of care include extended stays in nursing homes, assisted living, and memory care.

The first big challenge with LTC is trying to figure out if you’ll need it or not. As you can see in this chart below, there’s essentially a 50/50 chance whether you’ll need long-term care or not!

About 53% of people should expect to need NO long-term care when they’re older. My great-grandmother Lillian was a great example. She lived into her mid-90s and was sharp as a tack her whole life.

On the other hand, about 16% of adults will spend a considerable amount of time (2+ years) in long-term care.

The other big challenge is that the majority of long-term care costs are paid out-of-pocket. Medicare will pick up the tab for a while but not forever. As the chart below shows, people needing LTC can expect to pay ~53% of their total LTC bill out of their own pocket.

For anyone who has a loved one in a nursing home or memory care, you know these costs can be huge. Experts have told me that the cost for an average nursing home can run $5,000-$6,000 a month. In the case of a memory care issue such as Alzheimer’s, these monthly costs can skyrocket to $10,000 or more!

The key challenge with long-term care is that you’re dealing with two uncertainties.
1) Probability of needing long-term care, and
2) Cost of long-term care if needed

When you put these to uncertainties together, you get a graph that looks like this:

You have a 48% chance of not spending anything on long-term care. But look at the right-hand side of the chart: You have a 15% chance of incurring over $250,000 in long-term care costs! All told, 26% of people should expect to spend at least $100,000 in total long-term care costs in retirement.

My Recommendation: Regardless of how healthy you are, you should think about saving something for long-term care costs.

Conclusion: Planning for Healthcare Costs in Retirement

Last week I talked about using Health Savings Accounts (HSAs) as a way to save for your future healthcare costs. You can check out the post for more details, but the key advantage of HSAs is that they enjoy “triple-tax” advantages.

  • You get a tax deduction putting money into an HSA
  • Money that’s invested in an HSA grows tax-free
  • The money you take out for medical expenses is also tax-free

No other account gives you these three tax advantages.

Naturally, you might ask, “Well what if I don’t need all the money in my HSA when I’m retired?” Good question!

If you’re over Age 65 and you take money out of your HSA for non-medical costs, you’ll have to pay income tax on what you take out. You will NOT incur a penalty! This is exactly the same way a Traditional IRA works. You get a tax break when you put money into the IRA but then pay income tax when you take it out.

[Note: if you take money out of your HSA for non-medical costs BEFORE Age 65 you will also pay a 20% penalty. Don’t do that!]

But let me repeat what I said before: It’s always best to plan for the worst and hope for the best. When dealing with healthcare costs in retirement, it’s always a good idea to err on the side of conservatism.

Having TOO much money saved up for your retirement healthcare expenses is a GOOD problem to have. Not having enough puts you and your family in the uncomfortable position of having to choose between cost and quality of care.

I hope this post helped you frame a very important issue that you need to consider in your retirement plan. If you want help with your plan, simply hit the “Contact Me” button below.



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