How Much Will You Spend on Medical Expenses in Retirement?

School of Financial Wellness

Calculating medical costs in retirement can be difficult

The process of retirement planning is difficult and ongoing. With so many variables to consider, most attempts to calculate a hard figure for any retirement expense, especially medical expenses, typically results in a “ballpark” figure at best. However, it is critical to have an estimate of your retirement expenses in order to develop an effective retirement plan.

Luckily, the Employee Benefit Research Institute (EBRI) has recently taken some of this legwork out of the process. In May of 2019, they published an issue brief on this very topic1. Their research resulted in some estimates that may blow your mind if you haven’t already been exposed to the enormous costs of healthcare in retirement.

Who is the EBRI?

The EBRI is a nonpartisan, tax-exempt organization that was created in 1978. The purpose of the organization is to contribute to “sound employee benefit programs and public policy through independent, objective, fact-based research and education.”

The EBRI claims to have over 100 members hailing from a variety of different companies. Their members include plan sponsors, providers, asset managers, unions, consultants, doctor groups, hospital groups and more.

What did we learn about medical costs in retirement from the EBRI report?

First, prepare yourself as the numbers are large and can be shocking to some. If you’ve already met with a CFP™ and have an up-to-date retirement plan in action, then you should take comfort in knowing that your plan is accounting for these expenses.

Let’s start with the average couple. In 2019, a couple in relatively good health – indicated by median prescription drug costs, both retiring at 65 years old, would need an estimated $183,000 in savings to have a 50% chance of covering their health care expenses in retirement.

Let’s think about that further. If you were a gambler and were happy with a coin flip determining whether you could afford your healthcare in retirement, this amount might be enough for you. For those who are more risk averse, this doesn’t sound like a great situation.

Most of us need more confidence that our savings can cover our medical expenses in retirement.

For most of us, a 50% chance of making it through retirement with enough money to cover our health just isn’t going to cut it. Most of us would like more confidence than a coin flip. So, let’s look at the 90th percentile.

If you are the same average couple, still retiring at 65, you would need an estimated $301,000 to have a 90% chance of having enough money to cover your healthcare expenses in retirement, according to the EBRI. That’s a huge jump, $118,000 to be exact, from the savings needed to meet the 50th percentile. This alone should let you know how much variation exists in the amount needed for medical expenses in retirement.

Your prescription drug needs can drive big changes in your medical costs in retirement.

Unfortunately, we have some additional news from the EBRI report. For those couples who expect to have prescription drug costs above the median, the estimates can grow quickly.

If you expect your prescription drug costs to be in the top 10% (or the 90th percentile) you can expect to need over $360,000 just to cover your healthcare costs in retirement. This is an enormous amount of money, so you should speak to a CERTIFIED FINANCIAL PLANNER® as soon as possible if you don’t already have a plan in action.

How much of these costs will be covered by Medicare?

There’s good news and bad news here. The good news is Medicare is already reducing costs significantly to get to the figures stated above, by about 64% as of 2016 data provided in the EBRI report.

However, the bad news is Medicare wasn’t designed to cover all expenses in retirement. And with a growing population and cuts to the program, the percentage of total medical costs it will cover is expected to decrease over time.

What should you do to gain confidence that your retirement plan will meet your medical needs?

The first and most important step is to consult with a CERTIFIED FINANCIAL PLANNER®, like our own Patricia Burris, CFP™, who specializes in Medicare and Social Security. If you are looking for a team of professionals to manage your wealth and create a comprehensive plan for your retirement, don’t hesitate to contact Meld and learn about our proprietary financial planning program, Situational Investing. In the end, it is your retirement, but you need a professional to help make sure you don’t make critical mistakes that could derail your plan.

References:

1The report from the EBRI, dated May 16, 2019, as well as the information gathered above can be found at the EBRI website and on this page.