Do You Have Enough Saved for Healthcare Costs in Retirement? Probably Not

First, the bad news. According to a recent report from Fidelity Investments, a 65-year-old opposite-gender couple who retires today can expect to spend on average $300,000 on healthcare costs in retirement. This figure is 30% higher than it was just 10 years ago. 

While there is a lot of variability around this figure — some couples will need much less while others will need a lot more — the simple fact that healthcare costs are increasing with no end in sight should be enough to make any retiree nervous. This estimate depends on longevity projections by the Society of Actuaries, which forecasts that men will live to 87 and women to age 89.

According to the Federal Reserve Board, the median net worth for Americans aged 65-74 is $266,400. So, if a retired couple in this age bracket can expect to pay $300,000 or more in healthcare expenses, this could potentially leave them in debt or unable to afford essential healthcare.

It will be useful to investigate what’s driving the increase in healthcare costs in retirement, how much it’s expected to cost even later (like for someone in their 30s today), and how people can prepare for that.

Why Healthcare Costs in Retirement Are Increasing

One reason for the increase in healthcare costs for those aged 65 and over is inflation, with healthcare expenses rising faster than other costs.

Another reason is that people are living longer, which means that there is a greater chance of needing to pay for medical treatments and medications for longer than retirees in the past. The average life expectancy in the US in 2019 was 78.8 (it dropped to 77.3 in 2020 due to the COVID-19 pandemic). In 1990, life expectancy was 74.89. Those few years’ difference can result in potentially significant healthcare costs in retirement.

A further reason for the rise in these costs is the advances in treatment and technology we’ve seen over the years. Better treatments improve the physical health and overall well-being of many retirees, but they can entail a much higher price tag than the less technologically advanced treatments. Furthermore, the demand for many advanced treatments is increasing. 

A report from RBC Wealth Management, for instance, notes that “so-called maintenance procedures like joint replacement and cataract surgery are increasingly common”. 

Healthcare Costs in Retirement in the Future

Healthcare costs for retirees may increase in the future, which anyone in their 30s today, for example, should be aware of. It is difficult, nonetheless, to forecast exactly what these costs will be. Hope Manion, senior vice president at Fidelity Workplace Consulting, states in a 2019 report from Fidelity Investments:

“We recognize that when today’s 35-year-olds retire in 2049 their medical costs could be more than this year’s estimate, and the U.S. healthcare system could potentially look dramatically different. It’s hard for any of us to predict that far out, but it’s prudent to anticipate that health care costs could represent a significant expense in retirement and prepare as much as we can.”

Any increase in costs could be due, in part, to rising inflation, as well as more advanced (and expensive) medical treatments becoming more commonplace. 

Another reason why someone in their 30s today might have to pay more in retirement is that they could live longer than the previous generation, due to advances in healthcare. However, according to a study from the Institute for Health Metrics and Evaluation, American life expectancy will reach 79.8 years by 2040, which is only a minimal increase when compared to the life expectancy in 2016: 78.7 years. For this reason, age may not be a significant factor in healthcare costs in retirement in the future. 

How to Prepare for Healthcare Costs in Retirement

There are several ways that someone in their 30s today can prepare for any potential increases in their healthcare costs during retirement. Marion writes:

“We’re often asked how we can help people better understand the power of investing to grow their savings over time, especially for young adults who have time on their side. My suggestion: save early and save often. We know that consistency and compound interest help save for the future.”

Also, your saving goals should be realistic and account for that 5% inflation rate in any calculations you make. 

In addition, you can use healthcare saving tools, the major being Health Savings Accounts (HSAs). These are investment accounts, and they make great savings vehicles because they come with a triple tax benefit:

  1. Contributions are made on a pre-tax basis
  2. Investments can grow tax-free
  3. Withdrawals for qualified healthcare expenses are tax exempt

You can invest your HSA dollars in a variety of vehicles as well, such as mutual funds, bonds, stocks, and exchange-traded funds (EFTs). A further option is to invest in a Roth 401(k). Contributions are taxed when you initially deposit money but you can withdraw your money tax-free during your retirement. Start saving early and the tax hit will be low. Your dollars will be able to compound, tax-free, for decades. 

It’s never too late to start saving. But you need to save wisely. To achieve this, we recommend dividing your expenses into different categories, such as needs, wants, and wishes. Healthcare should, of course, be in the first category and be as much of a priority as basic living expenses and retirement savings. You might need to drop some of your wants and wishes, such as an extra trip every year, but you will thank yourself for this later when paying for a necessary medical expense.

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