Healthcare Costs in Retirement

Dec 14, 2015 by

Retirement Ahead road sign

Many Americans these days aim to work until they die. With no savings, they have no choice. But reality typically explodes even carefully devised plans, which aiming to work until death is not. Declining health sidelines almost all of us, often many years before we reach their expiration date. But we’ve got a Plan B: Social Security. A couple retiring today might expect Social Security income of $30,000 per year; not a fortune, by any means, but perhaps enough to live modestly in a low cost of living part of the country

Expected Health Care Costs in Retirement

But there’s a glitch in Plan B, living off Social Security: healthcare expenses.

During some recent Interweb travels I ran across a report put together by an outfit called HealthView Services titled “2015 Retirement Health Care Costs Data Report©“. Describing the Report’s overall message as “alarming” would be a gross understatement. “Stunning” would be closer, but still inadequate.

I’ll reproduce here a couple of the Report’s tables (thank you HealthView Services!) to make the point:

retirement health care costs

The upshot: A 65-year old couple retiring today can expect to pay $583 per month in healthcare costs (we’re talking averages here). Over 20 years that cost will jump by nearly 110% to $1,211 a month, in constant dollars. These numbers assume the couple has Medicare Parts B and D and a supplemental insurance policy.

Expected Social Security Income

Now let’s have a look at the feasibility of Plan B: living off Social Security alone in retirement.

First, historically, healthcare expenses rise faster than inflation, sometimes far faster. (In 2014, HealthView Services says healthcare cost inflation was bout 3.6%, four times the 0.8% Consumer Price Index increase.) Social Security checks increase annually by a Cost of Living Adjustment, or COLA, which is always less than healthcare cost inflation. So if we line up a retiree’s Social Security income with his or her healthcare costs, guess what’s going to happen over time?

social security and healthcare costs

Projected annual healthcare costs for a typical retired couple are in the first column, then Social Security benefits, and then the difference between the two, in dollars and by percent of Social Security benefit.

At age 70, a very large chunk—43%—of the couple’s Social Security checks go to healthcare. That leaves about $19,000 a year for rent or home maintenance + property tax, gasoline, groceries, clothing, and electricity.

But look what happens over the next 17 years as healthcare cost inflation and growing needs as the couple ages outstrips their Social Security COLAs: by the time the couple is age 87, almost 90% of their Social Security income will be eaten up by healthcare. Their budget for non-healthcare living expenses has tightened steadily, passing the cat food diet point long ago.

Kiss Your Social Security Check Bye Bye

What’s a reasonable takeaway from the Report’s well founded analysis? Just assume, in very rough numbers, that all of your Social Security benefit will be turned over to insurance companies, drug companies, and medical providers. Your pre-retirement nest egg has to be large enough to cover the cost of where you sleep and everything else you might want to do, eat, and wear when you’re not in hospital.

If that doesn’t motivate you to jumpstart your savings in 2016, I don’t know what will!

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  • Tina@Profinance

    Good post on ‘Healthcare Cost in Retirement’ Kurl! Actually, retiree health-care costs may be more than what we think. According to Fidelity’s 2015 Healthcare Cost estimation for a couple age 65, should expect to spend an estimated $245,000 on health care in retirement.

    • Thanks for that addition to the discussion Tina. For my wife and I, potential health care costs are the biggest–and scariest, because they’re unpredictable and largely uncontrollable–unknown about our cost of living for the rest of our lives. We’ve done what we can by moving to Canada, but other than that I don’t know what to do besides do my best to stay healthy and maintain a large financial health care contingency fund.

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