6 Ways to Prepare for Steep Health Costs in Retirement
Avoid facing sticker shock in the future by taking these steps now
But don’t forget: that $220,000 is an average cost. Retirees’ real-world experiences vary widely, because individuals face vastly different health outcomes.
“There is no such thing as an average healthcare expenditure,” said Robert Friedland, a certified financial planner in Rockville, Md. “Averages are just not meaningful; if they were, then health insurance would not be so important.”
Katy Votava, president of health-care consulting firm Goodcare.com, expressed a similar opinion. “Averages on healthcare costs overestimate for most people and underestimate for some,” she said.
But too many Americans seem to believe they’ll be on the lucky side of the health-cost ledger. Fully 71 percent of respondents in the Fidelity survey said their health will be “better than average” in retirement.
Pre-retirees also tend to underestimate their retirement health costs: Among people aged 55 to 64, almost half of them predicted they’d need a total of $50,000 to pay for their retirement health expenses, according to Fidelity’s research.
But by Votava’s estimates, a Medicare beneficiary whose adjusted gross income is about $85,000 ($170,000 if married filing jointly) will spend an average of about $8,000 a year on routine medical expenses in retirement. And that figure will rise each year, thanks to the relatively high inflation rate of health costs.
Prepare to Spend More Than You Expect
“There’s a huge amount of sticker shock when people retire. That can be avoided by planning ahead,” Votava said. “Plan for the routine and then it’ll be clearer to you how much money you have left over to cover a long-term-care event if it happens.”
Still, if you’ve been paying for health care throughout your working life, or maybe you retired before age 65 and have been paying for an individual health plan, your retirement health costs may not be that surprising. “The costs are more palatable for those clients that were paying their own premiums before they retired,” said Brett Horowitz, a vice president and wealth manager with Evensky & Katz in Coral Gables, Fla. “Many have indicated that their healthcare costs have gone down once they were eligible for Medicare.”
Others agreed. “Most clients don’t have stifling costs as Medicare and the supplement programs seem to adequately provide for most,” says Rick Kahler, a certified financial planner and founder of Kahler Financial Group in Rapid City, S.D.
The dealbreaker is often long-term care. “I see the worst of the expenses when a person goes into long-term care,” Kahler said.
Here are six tips for avoiding health cost sticker shock in retirement:
Have a Plan
Instead of fainting at that eye-popping six-figure number, break it down into annual costs. “I build in annual spending that increases more than inflation,” Friedland said.
Andrea Coombes is a personal-finance writer and editor in San Francisco. She's on Twitter @andreacoombes.