How Have You Planned for Healthcare Costs in Retirement?

Good to Know

The purpose of this article is to separate fact from fiction and help you motivate clients to plan, starting now, for the inevitable healthcare costs in retirement.

We’ll start with good news—Americans are living longer. Average life expectancy increased by almost 10 years during the 50 years ending in 2010, according to a study conducted by Penn Wharton.1  Regrettably, there is potentially bad news as well; the National Institute of Health2 estimates that many Americans will have 12.6 years (an increase of 2.6 years) with a serious illness during retirement.

How seriously should your client take the risks of runaway healthcare costs in retirement? We’ll answer that question by reviewing:

  • Three causes of rising healthcare costs,
  • How to separate fact from fiction,
  • Acting now—preparation ideas by age, and
  • Health care coverage for the impoverished.

Three Causes of Rising Health Care Costs

Three core causes of increasing healthcare costs follow.

  1. Americans are living longer but not necessarily healthier.
  2. Since 2000, healthcare inflation has averaged almost 5.5% while general inflation averaged only about 3.6%.
  3. The average American claims Social Security retirement benefits at age 62 but Medicare is not generally available before age 65.

Separating Fact from Fiction

Google “health care costs in retirement” and you’ll see an astounding range of estimated costs from under $100,000 to over $300,000.  These estimates generally describe total medical costs over 20 years or more (from retirement until death) and frequently ignore Medicare or other insurance reimbursements.

The author suggests that a more appropriate focus for retirees with health insurance should be managing estimated out-of-pocket costs rather than only total healthcare costs. According to the Center for Retirement Research,3 the average 65-year-old couple with a Medicare Advantage plan will need about $67,000 to pay out-of-pocket medical care costs during their retirement years. That works out to be about $3,350 in average annual out-of-pocket healthcare costs per spouse. Caveat—about 1 in 10 retired couples will pay as much as twice that amount.

Act Now—Preparation Strategies by Age

Early-Career Clients

  • Time is your client’s friend. Harness the power of compound return to supercharge your healthcare savings. For example, a 25-year-old could accumulate about $249,000 by age 65 by saving $125 monthly in a tax-deferred account with an average 6% annual return. That would be more than enough to cover average out-of-pocket health care even after factoring in inflation.
  • Tax-deferred or tax-free accounts include Health Savings Accounts, Traditional IRAs, Roth IRAs, and more.

Mid-Career Clients

  • These clients should continue saving for retirement health care costs (or start saving if not already doing so) and consider adding long-term care insurance as they approach the late career stage.
  • While reasonable minds can disagree, many recommend the purchase of long-term care insurance before a client reaches age 60 or even earlier.

Late-Career Clients

  • If at all possible, clients with employer-provided health insurance should work at least until age 65, Medicare health insurance is generally unavailable until that age (however, health insurance may be available from the Marketplace).
  • Waiting to claim retirement benefits until age 70 can add as much as 32% to annual Social Security Retirement benefits—this may be an effective strategy for clients with longer than average life expectancies. The added income can help pay for health insurance premiums and out-of-pocket health care costs.
  • Clients in this phase should have long-term care insurance—Medicare does not pay for purely custodial care!

Planning for the Impoverished Client

Paying health insurance premiums and out-of-pocket medical care costs can be an effective strategy for clients with means. But what about clients without financial means?  Medicaid provides health care insurance at low to no cost, including long-term-care insurance, to qualifying individuals with poverty-level income and investment assets of less than $2,000 (applies to most states).

The Bottom Line

Our purposes in this blog are to separate fact from fiction, motivate your clients to act now if they lack a healthcare savings plan, and provide broad insights into how Medicare, Marketplace, and Medicaid can apply to client needs. Because each client's need may be different, our call to action to you, the financial advisor, is to engage with your client and bring in other professionals as needed to help them understand how to manage this very real financial risk.


The information presented herein is provided purely for educational purposes and to raise awareness of these issues; it is not meant to provide and should not be used to provide legal, identity theft protection, investment, income tax, risk management, retirement, estate, or financial planning advice of any kind. An experienced and credentialed expert should be consulted before making decisions relating to the topics covered herein. There are variations, alternatives, and exceptions to this material that could not be covered within the scope of this blog.