Are Retirement Medical Costs Really That Scary?

Empyrion Wealth-Retirement Medical Costs

In its 2016 Employee Financial Wellness Survey, PricewaterhouseCoopers found that baby boomers’ chief fear about retirement isn’t running out of money; instead, they’re most worried about how they’re going to pay their medical costs.

This should come as no surprise, given all the data — presented by industry experts and journalists at regular intervals — about the high cost of medical expenses that retirees can expect to pay. The Employee Benefits Research Institute (EBRI) conducted a study indicating that a married couple retiring today can expect to spend over $270,000 on medical expenses, and a Fidelity study put the figure even higher, at closer to $280,000. With numbers like these, it’s no wonder that the 2018 EBRI Retirement Confidence Survey showed a marked decrease in retirees’ confidence in their ability to handle medical expenses.

Is this really the best way to look at these costs? As a financial planner working with thriving retirees (and those who aspire to be), I am in the business of helping people gain a realistic view of how they will fund their retirement. Without question, advice on planning for medical expenses — and every other kind of expense — in retirement is a valuable part of the service we provide. But the answers you get for any problem depend a lot on the questions you ask. So let’s take a closer look at the “boogeyman” — those “scary” retirement medical costs — and consider the real nature of the problem we’re trying to solve.

Spotlighting the “Boogeyman”

The fact is, medical expenses are just like most other expenses — they usually don’t come in a lump sum. When studies report numbers like those mentioned above, they are taking an average monthly or annual number, then multiplying it by whatever number of years the average retiree can expect to live.

So, according to “Planning for Health Care Costs in Retirement,” a June 2018 study conducted by Vanguard and Mercer Health and Benefits, a 65-year-old woman has median annual health care expenses — which include all Medicare premiums, copays, and other costs — of around $5,200. She may continue to bear that expense for 20 years or more, giving a total in excess of $100,000. If she is married, her spouse will likely incur a similar amount of annual expenses; and if the spouse achieves an average life expectancy, the couple could very easily spend a total well in excess of $200,000.

However, most retirees will handle these costs as they handle the other costs of retirement — housing, transportation, food, etc. — on a pay-as-you-go basis. Indeed, the average retiree spends more than three times the amount on food, clothing, and shelter per year in retirement as they spend on all medical costs — but unlike medical costs, these numbers aren’t typically reported as a six-figure lump sum.

Most retirees have a very good sense of what their ongoing monthly or annual medical costs will be, since these are directly impacted by the retiree’s general health, approaching retirement. Medicare and MediGap insurance rates are a known quantity that retirees can plan for; and though drug prices and copays will probably continue to rise for the foreseeable future, retirees can also anticipate those costs pretty accurately and build them into planning assumptions.

The point is, a solid plan for thriving retirees will take into consideration all these factors, along with all sources of retirement income as well as any health savings accounts (HSAs) or other sources of funding. In the same way that families budget for day-to-day expenses, it is possible to budget for retirement medical costs. The key is to build a plan that fits your lifestyle, your resources, and your overall financial strategy. We can help you get started and are here to assist you.

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