Aging Options

Predicting health care costs in retirement

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Health care expenses are a key component to retirement expenses, representing the second highest share of household expenses (behind housing costs).  When you are looking at expenses to determine whether you can afford to retire, a new report suggests that health care expenses break down into two categories.  The report, put out by the Employee Benefit Research Institute (EBRI), suggests that retirees think of health expenses as recurring and nonrecurring services.  Recurring expenses include copays for doctor visits, prescription drug use and dentist visits.  Nonrecurring expenses include expenses such as overnight hospital stays, overnight nursing home stays, outpatient surgery, and home health care.

According to the study, recurring services are a predictable expense that remains consistent across age groups.  For Medicare-eligible populations, the average annual recurring health care expense was $1,885 or $40,798 over a lifetime assuming a life expectancy of 90 and a 2 percent rate of inflation and 3 percent rate of return.  Recurring expenses do not include all recurring expenses such as insurance premiums or over-the-counter medication.  Nevertheless, recurring health care costs remain stable throughout retirement.

The nonrecurring expenses can bite you.  One reason is that they increase with age.  Nursing home stays can be very expensive but home health services and overnight hospital stays are much higher just before death as well.  Women over 85 have significantly higher nursing home usage than men.  Other differences between men and women are small.  It is not as easy to estimate the cost of nonrecurring expenses because the usage and the intensity of usage of these expenses are uncertain.

According to the study, more than 50 percent of those over 65 received in-home health care from a medically trained person before death.  Over 62 percent of those 85 and older had overnight nursing home stays before death and almost 52 percent lived in a nursing home prior to death.  During a two-year period, people over the age of 85 spent an average of $24,185 for nursing home expenditures.  Those individuals in the 90th percentile spent $66,600 during the same time frame.  Probably because of Medicaid, usage of recurring health care services went up with income while usage of non-recurring health care services went down with income.

EBRI recommends a three-prong approach to planning for health expenditures utilizing separate preparations for predictable and less predictable health care cost with a contingency plan for back-loaded expenses (those costs that reach their peak at the end of life when financial resources may be smaller).

This particular study did not aim to estimate the total cost of health care expenses in retirement.  A previous study estimated that to have a 90 percent chance of covering all health care expenses in retirement a man would need $116,000 in savings and a woman would need $131,000.  In a previous story, we covered a Fidelity estimate that a couple would need $220,000.  To read more about the report, please read the Wall Street Journal article.  To plan for those health care expenses, consider hiring a financial planner.

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