Grant’s Go-To’s: The Cost of Health Care – Another Reason to Save
Paying for the cost of health care in retirement is an important reason workers need to save for the future. Indeed, the Employee Benefits Research Institute’s (EBRI) 2021 Retirement Confidence Survey finds that health care costs continue to be a top concern for retirees.
Even though many costs decline in the retirement years, health care costs increase. As people get older, they visit their doctors more frequently and use more prescription drugs. In addition, healthcare costs tend to outpace inflation.
Few employers offer health benefits to retired workers, particularly during the years prior to Medicare eligibility at age 65. It’s probably safe to assume that a lack of retiree health coverage is common among workers eligible for State-Facilitated Retirement Savings Programs.
So just how much do retirees spend on health care? According to Fidelity, the average 65 year-old couple retiring in 2020 was projected to spend around $11,400 on health care in their first year of retirement. Fidelity estimates about 15 percent of the average retiree’s expenses will be devoted to paying for health care-related costs. In a report on the distribution of lifetime health care costs, the Boston College Center for Retirement Research estimates that at age 65, the average remaining lifetime health care costs are about $260,000.
Health care costs vary depending on a variety of factors such as where a retiree lives, their age at retirement and their health status and risk factors. Perhaps unsurprisingly, EBRI’s 2021 Retirement Confidence Survey finds workers who report being in poor or fair health are significantly less confident in their ability to live comfortably in retirement than those who report themselves to be in excellent or very good health.
Although the cost of health care may seem daunting to contemplate, it’s important to put these numbers into perspective:
· The cost of health care over the retirement years is not a bill that comes due all at once! – In terms of annual costs, a model developed by Mercer and Vanguard estimates that a typical 65-year old woman had health care expenses of $5,200 in 2018.
· While health costs in retirement are certainly significant, people over the age of 65 spend more on the categories of housing, transportation and food, according to the U.S. Bureau of Labor Statistics Consumer Expenditure Survey.
What’s the takeaway? People are concerned about how they will pay for medical care in their retirement years and rightly so. Retiree medical costs are a significant expense, and yet another reason why creating opportunities to encourage workers to save for their retirement years throughout their careers is so important.
This piece was featured in the July 29, 2021 edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.
