There are a lot of moving parts to consider when doing retirement planning. Pre-retirees have done a good job overall with addressing certain tasks, including estimating monthly expenses in retirement and determining the best time to take Social Security. These two tasks have been performed by 64% and 68%, respectively, of affluent pre-retirees according to the results of a Cogent Reports study, Investor Retirement Income Trends, published earlier this year.
Healthcare is another story. According to the study, only 29% have determined the most sensible Medicare option for their situation and 32% have evaluated financial protection against major health event expenses. In addition, just 24% have evaluated or purchased long-term care insurance.
Projected Retirement Healthcare Costs
In the beginning of 2014, Fidelity estimated that a 65-year-old couple retiring in 2014 would need $220,000 to cover future medical costs. This excludes extended care expenses and only applies to retirees with traditional Medicare insurance coverage. Fidelity has been doing this research for several years, with an estimate as high as $250,000 in 2010.
The Fidelity estimate is probably on the low side. According to an Employee Benefit Research Institute (EBRI) 2013 study, a 65-year-old couple retiring in 2013 with average prescription-drug expenses would need $295,000 to enjoy a 75 percent chance of being able to pay all of their remaining lifetime medical bills and $360,000 to have a 90 percent chance. Like the Fidelity study, these amounts don’t include extended care costs.
The Fidelity and EBRI studies assume average life expectancies. The projected healthcare costs of both studies are less than the amounts that I have calculated using HealthView Services’ HealthWealthLink software as part of the planning that I have done for my pre-retiree clients who have no signficant preexisting health conditions and lead a healthy lifestyle .
HealthView Services promotes its system, which is designed for financial advisors, as the first and only software that calculates precise healthcare cost projections through a client’s entire retirement lifestage. The company uses databases based on more than 50 million claims per year and actuarial projections from experts in healthcare cost modeling. In addition, calculations are based on age, gender, health conditions, state, and selected coverage.
Assuming a 65-year-old couple retiring today in Orange County, California with no preexisting health conditions, no tobacco use, who live to their respective health-adjusted life expectancies of 87 and 89, and have annual income of less than $170,000 each year (Medicare Part B premiums increase with higher income levels), they’re projected to incur annual estimated healthcare expenses totaling $10,000 in today’s costs. This includes $6,700 for insurance premiums and $3,300 for out-of-pocket expenses.
With inflation, healthcare expenses for this couple over their lifetime are projected to total $566,000. Like the Fidelity and EBRI studies, my projections don’t include extended care costs. $386,000, or 68%, of this amount is for health insurance premiums. $198,000, or approximately 50%, of premiums will be paid for supplemental, or Medigap, insurance. Medigap insurance, which is offered by private insurers, helps pay for many items not covered by Medicare, including deductibles, copayments, and coinsurance.
Assuming that (a) you’re paying Medicare Part B premiums to cover doctor’s, outpatient care, durable medical equipment, and many preventive services and Medicare Part D premiums for prescription drugs, or (b) you have a Medicare Part C, or Advantage, plan in lieu of paying for Medicare Parts B and D, and, further assuming that you have Medigap insurance, you need to also plan for out-of-pocket expenses. For my hypothetical 65-year-old couple, they will incur projected out-of-pocket healthcare expenses totaling $180,000, representing 32% of their projected healthcare expenses totaling $566,000. $89,000, or approximately half, of their out-of-pocket expenses are projected to be incurred for hearing and vision.
Don’t Neglect Extended Care Costs
As previously stated, the Fidelity and EBRI studies and my hypothetical 65-year-old couple case all ignore extended care costs. This includes long-term care insurance premiums and out-of-pocket expenses. Extended care can be a huge expense if uninsured given today’s cost and the fact that this type of care is generally not required until the final years of one’s life. Additional variables complicating planning include care setting, region, and length of care.
Let’s assume Jane, the wife of my 65-year-old couple living in Orange County, has no long-term care insurance and requires three years of home health care the last three years of her life. The average annual cost for this care today is $53,000. At age 87, it’s projected to be $101,000, with total projected costs of $311,000. Adding this to the couple’s previous projected healthcare expense total of $566,000 results in total projected retirement healthcare expenses of $877,000.
Should Jane’s care be incurred in a skilled nursing facility instead of at home, the average annual cost of this care today is $90,000. At age 87, this is projected to increase to $324,000, or a total of $1.032 million assuming care is required for three years. Adding in the couple’s other projected healthcare expense total of $566,000 increases their projected total retirement healthcare expenses to a heart-stopping $1.598 million.
We’re Significantly Underestimating Health Costs in Retirement
According to Aviva USA’s 2013 annual Wellness for Life survey of nonretired adults which was done in collaboration with the Mayo Clinic, nine out of ten people expected to spend less than 20 percent of their monthly retirement income on medical and dental expenses. Seven out of ten expected to spend 10 percent or less. According to The Urban Institute, we should be prepared to spend approximately 30 percent of our income on health care expenses in retirement.
Healthcare Planning is a Crucial Part of Retirement Planning
We cannot afford to overlook or underestimate healthcare costs when planning for retirement. It doesn’t matter whether you rely on the Fidelity or EBRI studies or HealthView Services’ calculation methodology as a source of information for projected retirement healthcare costs.
Healthcare planning is a crucial part of retirement planning. The first step is acknowledging and identifying the various components of retirement healthcare costs, including projected amounts of same, customizing them to each of our personal health situations.
Although the projected costs are mind-boggling in a best case scenario, the good news is that there are strategies that are available to plan for them. Sounds like the topic for another blog post.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.