One of the major concerns of retirees – and of folks who are pondering their eventual retirement – is the cost of health care. It’s a major concern for at least two reasons. First, of course, people realize that there can be significant health care costs as we age. But perhaps just as important is the fact that it’s an unknown – we don’t really know what our costs are going to be. While many (but not all) folks can make a reasonable estimate of what their insurance premiums will be, especially after age 65 when Medicare kicks in, it’s really difficult to estimate what your out-of-pocket costs might be because our future health needs are unknown. And then when you throw in possible long-term-care needs, it gets even murkier.
So I was glad to come across this post from Mike Piper at Oblivious Investor about a new study from the Center for Retirement Research at Boston College. This study (brief – pdf, full paper – pdf) used a variety of sources to try to compile what retirees spend on health care (including long-term care) and how much of that was covered by insurance (which effectively calculates how much they spend out-of-pocket). While the amount any individual (or couple) will spend will vary tremendously, by looking at the averages (and the extremes) we can get a better idea of what we might need to plan for.
The PDFs look at 65-year-old households (and 90-year-old households), but don’t distinguish between households that are single or married, so the data is combined across both types of households. Mike followed up with the author to break that down into amounts for single folks and for married folks who are 65, so I’m going to share that amount. (For 90 year olds, I’ll share the combined amounts.)
A few important caveats to keep in mind.
- First and foremost, this is out-of-pocket expenses, this does not include the cost of the insurance premiums themselves. For most folks over 65, this includes not only the Medicare premium, but their supplement plan premium. So the numbers below are above-and-beyond their insurance premiums, which can be reasonably significant in-and-of themselves.
- Because some people don’t get supplemental plans, and because the cost and coverage of supplemental plans vary widely, these numbers are not quite as informative as you might think at first. Someone who has a better supplemental plan could have a much lower out-of-pocket cost, but they may pay much more in premiums. And, of course, some folks have plans that are subsidized by their former employer or their retirement plans, which muddies the water even more.
- These list the “mean“, not the median. And as hopefully most folks know by now, means can sometimes be skewed by outliers in ways that make the “average” not as useful. In this case, there could be some folks who spend millions on out-of-pocket health care costs, raising the mean above what an “average” retiree might spend. On the other hand, there are 65-year-old households who die at age 66 and spend $0 on out-of-pocket health care costs, which could skew it the other way.
All of this is to say is that don’t look at these numbers as being very specific, just ballpark numbers, and directionally accurate when going from age 65 to age 90.
The mean out-of-pocket expenses (again, above and beyond insurance premiums) for a single 65 year old is $56,250, and goes up to $80,000 for a married couple. At the 90th percentile (so on the high end, but not all the way at the top), the amounts are $111,250 for singles, $163,750 for a couple.
Again, it’s really important to remember that this is above-and-beyond what they are already paying in insurance premiums, so you would add thousands or even tens of thousands (for a couple with an expensive supplemental plan) to this per year they live after age 65. The average female 65 year old in the United States will live to age 86, and the average male to 83, so you’re looking at an average of about 20 years. So you’re likely adding around $50,000 to these amounts for a single person and around $100,000 to these amounts for a couple (and possibly more). For folks who retire before age 65, this amount will be even higher as insurance premiums are much more expensive pre-Medicare.
Interestingly, for folks who live to 90, there is still a significant amount you can expect to spend out of pocket going forward. Note that this is for combined 90-year-old households, not separated into single and married – although I think we can assume it’s highly skewed toward single. And, again, this doesn’t include the cost of insurance premiums (numbers are in thousands).
Because health care costs in retirement are an unknown, I think many folks just throw up their hands and say, “Well, since I don’t know, I’m just not going to worry about it.” I think that’s the wrong approach. While I don’t think people should stress out about it (as that will cause increased health care costs :-), I think they should incorporate this into their planning.
So, what’s the takeaway? Well, again, keeping in mind all of the caveats, clearly folks are right to be concerned about health care costs (including premiums) in retirement. Which means that ideally they would be including this in their retirement income/spending/saving plans. I think this gives even more of a boost to using your HSA as a stealth retirement account for those who have access and can afford to do this. I think this is a very underappreciated – and probably underutilized – approach.
And one more takeaway would be to not only invest financially for your retirement, in order to live the life you want to lead and be able to afford these health care costs, but you should invest in your health as well. Because there is such wide variation in the costs we experience, spending at least as much time and effort on your health as your investments would be time well spent that will likely decrease your financial costs in retirement. And because the healthier you are, not only are you less likely to spend the mean (or the 90th percentile) on health care costs in retirement, but your healthspan – the number of years in retirement where you are in good health and can really make the most of your time – will likely be extended as well.
So what steps are you going to take in the next month/year/decade to prepare for this?