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The Average Cost of Healthcare in Retirement

17 March 2015 in Investing Insights

Retirement is something people tend to look forward to for years. They may put money into their 401(k), or plan out the trips they would like to take, and perhaps even count down the days until they hit that magical age they have been waiting for. While retirement typically sounds like a dream come true, how many people really know what it takes to retire?

Consider the cost of healthcare. What percent of your expenses do you think will be spent on health costs? As seen in the graphic below, studies have shown that 7 out of 10 people anticipate that only 10% of their expenses in retirement will go toward health costs, when a more realistic estimate is 30%.


Fidelity reports that a retired couple could spend approximately $220,000 on health related costs, which does not even include long-term care. While $220,000 may not be affordable for a lot of people, the good news is these projected costs stayed flat between 2013 and 2014, and are down from a peak estimate in 2010 of $250,000.

But let us get real. $220,000 requires more than $300,000 in gross earnings assuming a 30% effective tax rate. Will you be able to save this much?

Why the High Cost?

U.S. citizens qualify for Medicare at age 65, but this still comes with a cost. As Medicare.gov explains, there are different options to consider for coverage, premiums, and deductibles. Part A covers inpatient hospital costs, stays at skilled nursing facilities, hospice care, and home health care visits. As long as you qualify, there are no premiums paid for Part A, but the deductible is $1,260 (for 2015).

Part B is for medical insurance, and the cost per month is based on your earnings. Medicare reports that most people pay $104.90 per month for Part B, with a yearly deductible of $147. The cost of Part D, prescription drug coverage, is also based on earnings. At minimum, the base rate in 2015 is $33.13 per month for this coverage. If you pay the minimum amount, but hit your deductible each year, then your health insurance (for these three parts) would cost an average of $255.28 per month, or $3,063.36 per year.

Confused yet? Medicare is a classic example of how cumbersome government programs can be. No wonder why average American citizens improperly estimate the cost of health care in retirement.

Using our above annual estimate, if you and your spouse live for 10 years after you retire at age 65, your basic medical expenses could total $61,267.20. This is pricey, but still a far cry from the estimated $220,000. So what additional costs might be incurred beyond the basic Medicare expenses that could add up to 220k?

1) Prescription drugs – The base rate is only $33.13, but if you actually need prescriptions, you could pay 50% or more of the cost of a medication if you surpass the initial coverage limit, which is $2960 for covered drugs in 2015, including the deductible. This is known as the coverage gap. So, one’s out of pocket costs for prescriptions may total several thousand dollars per year.

2) Copays and 20% of the service beyond the deductible – Even if you hit your deductible, the rest of your medical bills may not be fully covered by Medicare. You could still owe as much as 20% of the Medicare approved amount of the bill. And 20% of a major surgery could easily total many thousands of dollars.

3) Eyeglasses and hearing aidsHearing aids aren’t covered by Medicare, and neither are eyeglasses unless you are eligible after cataract surgery. So you would likely need to pay for these expenses entirely out of pocket.

How to Spend Less on Healthcare in Retirement

If you are scared by large figures of healthcare costs that can arise in retirement, aim to do whatever you can to spend less. Start by improving your health now, with these tried and true tips described by Aviva. Consider these five areas and you may be on your way to helping lower healthcare expenses in retirement.

1) Lose Weight – With added weight comes further health concerns, and therefore, more bills. Take a look at a BMI calculator to estimate your existing state and calculate where you should be. Better yet, go see a free fitness consultation at your local gym and let them tell you the truth about you.

2) Eat Healthier – Sugar and processed foods are known to be tremendously health culprits if consumed beyond moderation. They are not doing your waistline or your wallet any favors.

3) Exercise – Go out for a walk or a swim. Pick up a sport that brings a smile to your face so that you are not constantly thinking about when your cardio exercise will end.

4) Get Adequate Sleep – Sometimes people condition themselves to sleep less so that they can do more throughout the day. While this may help with your task list, it can adversely affect your health. The body uses sleep to function and perform and its best.

5) Improve Relationships – Stress can often result in illness. Patch up your relationships and you could experience a healthier life.

Healthcare Costs in the Future

If you are not ready to retire in the near future, you may be wondering, “Okay, if $220,000 is the approximate average healthcare costs for retirees today, what could it be 10 years from now?” According to the Centers for Medicare and Medicaid Services, out-of-pocket healthcare spending is expected to rise by 6.0% or more per year through 2023. If this percent holds true for the next 10 years, the bill could end up closer to $394,000 out-of-pocket for healthcare costs in retirement!

For those that have not yet started saving for healthcare costs in retirement, but plan to retire in 10 years, what might it take to reach a savings goal of $394,000 to pay for healthcare expenses starting at zero? Using a hypothetical example that assumes a 7% annual rate of return on the investments, one could invest approximately $26,670 per year to try and reach that target.

Be Ready For Your Future Retirement

Healthcare costs may be a substantial cost in retirement. Work on adopting healthy lifestyle habits now while building your retirement funds before it is too late. Eventually you will run out of time and energy. The trick is to realize now what is at stake for your future.

Consider one of the Horizon Motifs for retirement investing. If you are looking for an investment solution to help save for retirement, there is a Horizon motif that you can tailor for your time horizon and risk tolerance. They can provide you with a low-cost, broad based portfolio of investments as a foundation of your portfolio.

Motif Investing also offers no fee Traditional IRA, Roth IRA and Rollover IRA retirement accounts. Get started today.


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  1. Brian
    17 Mar at 4:27 pm

    The costs are intimidating but being in denial about how expensive things can be isn’t going to help anyone. I’ve been building up my retirement account over the last ten years or so and started maxing out my 401k as soon as I could afford it. I agree staying healthy is so important and I’m trying to eat better and get regular exercise.