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6 health care cost factors that can drain retirement savings

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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 — especially with projections that health care costs will continue rising 1.5 to 2 times the consumer price index (CPI) — 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…

blue icon clock with number 65

Missing the Medicare sign-up can cause a penalty

Even if people plan to delay receiving benefits because they're working, they still need to sign up for Medicare 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.

Inflation will increase lifetime health care out-of-pocket costs

Short-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 $259,808 more for their health care expenses during retirement.

The compounding effect of rising health care inflation can mean significantly higher lifetime out-of-pocket health care costs in retirement, projected to be:

Retiring at age 65  Lifetime retirement health care costs
65-year-old couple retiring now $673,587
55-year-old couple $1,073,717
45-year-old couple $1,770,276


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.

Nearly half of retirees stop working sooner than they expected

Largely due to health reasons or job loss, 46 percent 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.

Longer lives, higher costs

About one out of every three 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.

Long-term care is a reality for many Americans

Considering healthy 65-year-olds today, there’s about a 70 percent 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’ retirement savings, paying for long-term care could take a significant bite out of an individual’s retirement assets, especially if both people in a couple would need it.

Projected long-term care costs for a healthy 65-year-old couple

  Life Expectancy Duration of care Nursing home* Weekly home health care
44 hrs/week*
Female 89 1 year $205,000 $115,000
Male 87 1 year $193,000 $108,000
Combined     $398,000 $223,000
*national average, future value

Health care costs could outpace Social Security benefits

Although 2022 gave Social Security recipients the highest cost-of-living-adjustment (COLA) since 2008, these income boosts may not keep up with rising health care costs. In 2022, monthly premiums for Medicare Part B, 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’s healthy 45-year-old couple that retires at age 65 could pay 156% times 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: HealthView Services, 2022

Where do your clients stand?

More than a third (35 percent) of workers aren’t too or at all confident they’ll 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’ control can help close a potential income gap to help prepare them to retire financially secure … their way.

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