6 health care cost factors that can drain retirement savings
This content is categorized as:From a financial standpoint, health care is one of retirement's biggest "unknowns" with insurance premiums and deductibles, prescription drugs, and nursing care. Because the cost of staying healthy is difficult to predict 鈥� especially with projections that health care costs will continue (CPI) 鈥� it can be doubly hard to plan for.
Given these rising costs, health care is an expense that's critical for people to account for when setting their retirement savings goals. The key is to build a strategy that can solve for known expenses, while providing flexibility to help meet future needs.
Cost factors Americans need to consider鈥�
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Missing the Medicare sign-up can cause a penaltyEven if people plan to delay receiving benefits because they're working, they still need to sign up for three months before turning age 65. If they don't enroll in Medicare medical insurance or prescription drug coverage when first eligible, they may have to pay a late enrollment penalty for as long as they have coverage. |
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Inflation will increase lifetime health care out-of-pocket costsShort-term inflated health care costs can have long-term effects. For example, if inflation for health care costs remained at 1.5 times the CPI for just the next two years, a healthy 45-year-old couple today retiring in 20 years could expect to pay more for their health care expenses during retirement. The compounding effect of rising health care inflation can mean significantly higher lifetime in retirement, projected to be:
Health care costs include Medicare Parts B and D, Medicare Supplement Insurance Premiums, Dental Premiums and out-of-pocket expenses. Calculations assume that a healthy male and female will have life expectancies of 87 and 89 respectively, and will have a combined future modified adjusted gross income (MAGI) up to $176,000. |
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Nearly half of retirees stop working sooner than they expectedLargely due to health reasons or job loss, of retirees stop working earlier than they planned. That means they'll need to find a way to bridge the "income gap" created by the loss of wages they had planned on earning. |
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Longer lives, higher costsAbout 65-year-olds today will live until at least age 90, and one out of seven will live until at least age 95. The additional years of paying for medical insurance premiums and other health care expenses combined with health care inflation bump up lifetime costs. |
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Long-term care is a reality for many AmericansConsidering healthy 65-year-olds today, there鈥檚 about a chance of an individual needing long-term care at some time in their future. Factoring in rising costs, Americans living longer and how volatile markets have potentially impacted workers鈥� retirement savings, paying for long-term care could take a significant bite out of an individual鈥檚 retirement assets, especially if both people in a couple would need it.
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Health care costs could outpace Social Security benefitsAlthough 2022 gave Social Security recipients the highest since 2008, these income boosts may not keep up with rising health care costs. In 2022, monthly premiums for , prescription drug coverage and co-pays also jumped. Higher living expenses and health care costs that continue to trend up could easily outpace monthly Social Security benefits. Today鈥檚 healthy 45-year-old couple that retires at age 65 could pay their expected monthly Social Security benefit for health care expenses (if inflation for these costs remains at 1.5 times CPI for the next two years). Source: |
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Where do your clients stand?
More than a third of workers aren鈥檛 too or at all confident they鈥檒l have enough money to pay for their health care costs in retirement, according to the 2022 Retirement Confidence Survey results. Where do your clients fall on the retirement readiness spectrum?
Retirement planning isn't an exact science, but helping your clients think through variables now about future health care costs is a smart way to identify a potential income gap. Remember to include factors that could increase their health care costs (i.e., inflation or multiple years of long-term care) and reduce their purchasing power in retirement.
Creating a holistic financial strategy with solutions that can account for higher out-of-pocket health care costs and other variables that may be out your clients鈥� control can help close a potential income gap to help prepare them to retire financially secure 鈥� their way.
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