The spending wildcard in most Retirement plans is medical care. For many years, we were largely on our own when estimating these costs. Recently, detail-ed estimates of retiree medical spending have been issued to guide our planning.
The latest estimate is that the typical married couple, with each spouse each 65 today, jointly will spend $197,000 of their own money on medical expenses over the rest of their lives. These payments include insurance premiums, copayments, noncovered care, and home care, according to the Center for Retirement Research at Boston College. (A previous study from the CRR concluded that in 2007 a married couple age 65 would spend $7,600 on Medicare premiums and copayments, not including care Medicare doesn’t cover such as dental and vision care.) The estimate does not include the cost of nursing home or assisted living care.
More usefully, this study goes beyond simply computing an average or typical cost per couple. It calculated the probability of a couple’s spending significantly more than the typical amount. The study computed as 5% the probability the typical 65-year-old couple will spend more than $311,000 during their lifetimes.
The study also estimated that when nursing home care is included, the 65-year-old couple will spend $260,000 during their lifetimes, with a 5% risk it will exceed $570,000.
The medical costs a retiree faces include premiums for Medicare Parts B and D, Medigap insurance, and any employer-sponsored retiree medical insurance. Other expenses are copayments for services covered by Medicare or other insurance and the full cost of services not covered by Medicare or other insurance, including dental, vision, and hearing care.
The cost estimates were made by using data from a database called the Health and Retirement Study. This data was used to develop simulations of lifetime medical care for different households. The estimates also assumed per-capita health expenses increased 4.2% annually, adjusted for inflation, though the rate of growth varies for individuals based on their health and medical needs.
When potential nursing home costs are added to the estimate, the lifetime cost increases significantly, especially for the few who incur the highest costs.
The study also projected lifetime costs at different ages, in five-year increments, after age 65. The interesting result is that while remaining lifetime medical costs decreased after age 65, they did not decrease by a meaningful amount until age 80. Even at age 90, estimated costs for the average couple were around $100,000 for the remainder of their lives, with a 5% probability of exceeding $200,000. When nursing home expenses were included, lifetime expenses for the average couple at age 90 still were almost $200,000 and over $400,000 for the unlucky 5%.
We can draw several conclusions from this study that should be factored into your planning:
- Retirement medical expenses are highly uncertain for any retiree. The out-of-pocket cost depends on a combination of the individual’s health history and insurance coverage.
- Insurance is helpful in forecasting and controlling costs, because it transfers much of the risk of high medical expenses to the insurer. The insurance, however, will increase your annual costs for the years when high medical expenses are not incurred and are not claimed.
- As a number of studies have shown, for most individuals a large percentage of lifetime medical costs are incurred in the last year or so of life. These generally are long-term care expenses and the cost of treating final illness. That is why projected lifetime expenses decline very gradually until age 80 and later.
- Long-term care expenses will be significant for a relatively small percentage of the population. For them, the costs will be far in excess of their personal assets. As we have advised before, those of you who can afford long-term care insurance and don’t want to take the risk of impoverishing yourselves and your families with long-term care expenses, should buy the insurance.
- Medical expenses have increased faster than consumer price inflation for some time, and that is likely to continue.
As the years go by, medical expenses are likely to become a larger portion of your spending.
Most retirees seem to intuitively understand that medical expenses are likely to rise significantly as they age. That is why many, even the very wealthy, spend at a lower rate than simple financial projections indicate they could. They don’t want to take the risk of having their savings depleted by late-in-life medical care or long-term care or have to substantially decrease other spending to pay for medical care.