A Financial Planner's Guide to Planning for Retirement Health Care Expenses

If you're like many pre-retirees, you dread the task of estimating your retirement health care expenses.

That's because this somewhat complex task involves projecting expenses around unknown future health problems, while debating the merits of Medicare Supplements (aka Medigap) vs Medicare Advantage or comparing health care exchange policies if you aren't yet eligible for Medicare.

Avoiding or postponing this task can lead to the tendency to underestimate retirement health care expenses.

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

A Jackson study found that nearly two-thirds of pre-retiree investors underestimate their expected health care retirement costs and responded that they anticipate health care expenses significantly below the retirement average of $8,600 a year per person.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

Health care costs vary in retirement based on when you retire, how healthy you are, how long you are likely to live and health care price inflation.

In this article, you'll learn what health care expenses you might expect in retirement and how to proactively plan for them.

Retirement health care expenses

You can divide retirement health care expenses into these five common categories:

• Premiums. Monthly cost for the coverage you select
• Deductibles. The amount you pay upfront for certain services before coverage kicks in
• Cost-sharing or copays. Costs for doctor's visits, medical procedures, lab tests and prescriptions that you pay a portion of
• Out-of-pocket costs. Costs for doctor's visits, medical procedures, lab tests and prescriptions that aren't covered by your insurance
• Long-term care expenses. Costs for assisted living, nursing home care and home health aides, which are not covered by Medicare

Medicare eligibility begins at 65. According to a study from Milliman, the earlier you retire before Medicare eligibility, the more your health care costs will increase. Conversely, the longer you wait to retire after age 65, the more your costs decrease.

Living even five years longer than your targeted life expectancy will increase your health care spending by 42%.

Because health care costs tend to rise faster than general inflation, your health care spending is likely to increase at a higher rate than you may expect over a 25- to 30-year retirement.

Retiring before age 65 means you'll have to pay more of your own health care expenses because you won't be covered by employer health care insurance. You'll either need to continue your employer-based coverage — potentially at your own cost — or sign up at HealthCare.gov, also known as Obamacare and the Affordable Care Act (ACA).

Costs on the exchange depend on your income, where you live and the type of coverage you sign up for and include a combination of premiums, deductibles, copays and out-of-pocket costs.

Depending on your income, you may qualify for a government subsidy for your premium. If you don't, premiums for an individual insurance policy on the ACA Marketplace run on average between $800 and $1,200 a month for someone age 62 to 65.

Looking for expert tips to grow and preserve your wealth? Sign up for Building Wealth, our free, twice-weekly newsletter.

Once you are on Medicare, you'll have ongoing premiums that stack up differently depending on whether you choose a Medicare Advantage plan, which covers your hospitalization, doctor's visits, prescriptions, lab work and outpatient care, or whether you go with a Medicare Supplement plan that supplements traditional Medicare.

How to plan for health care expenses in retirement

Regardless of whether you're covered by Medicare or the ACA, yearly average medical costs in retirement — excluding long-term care — average $8,600 a year, according to the Jackson study mentioned above.

Use this as a baseline for your first year of retirement and bump it up annually to cover inflation and the higher cost of health care inflation.

A good potential rule of thumb would be to add 5% a year to the $8,600 figure and stick that in your budget.

The table below shows how health care costs, excluding long-term care, are likely to rise every five years after retirement.

Of course, your costs are likely to vary, perhaps even significantly, should you have a chronic or life-threatening health condition, but budgeting in this way will at least keep you in the neighborhood where your costs are likely to end up.

Source: SEC Compound Interest Calculator

A final word

Health care expenses could be a major factor in retirement income and expense planning.

By understanding what your health care costs are likely to be in retirement and factoring those costs into your retirement expense budget, you're likely to create a more realistic idea of your retirement expenses and avoid unexpected, budget-busting expenses.

Lucas Cox, CFP®, CKA®, RICP®, NSSA® is a financial advisor at The Lighthouse Planning Company in Russellville, Arkansas, and a licensed insurance professional. AR insurance license #16128263. Investment advisory services offered through CreativeOne Wealth, LLC, a registered investment adviser. Confident Financial Solutions and CreativeOne Wealth are unaffiliated companies. We are not affiliated with or endorsed by Medicare or any government agency, and do not provide tax or legal advice.

This material is for informational purposes only and should not be construed as a recommendation or advice for your particular situation. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company.

Related Content

• Five Smart Moves for Retirement Health Care: From HSAs to Medigap Policies
• Don't Let Health Care Costs Wreck Your Retirement: Here's How
• Where to Retire for the Perfect Mix of Health and Happiness
• Planning for Health Care Costs in Retirement: A Comprehensive Guide
• How to Age-Proof Your Retirement Plan