On Retirement

Breaking Down Health Care Expenses in Retirement

Sudipto Banerjee, Ph.D., Senior Manager, Thought Leadership
Key Insights
  • Given that health care costs are incurred over time, it makes more sense to view them as an ongoing regular budget item instead of a lump sum needed at the start of retirement.
  • Health insurance premiums account for nearly 75% of retirees’ annual health care expenses1 and, for the most part, are predictable and can be paid from monthly income. However, out-of-pocket expenses can vary and should be paid from savings.
  • Traditional financial planning principles and basic budgeting can help address many of the financial unknowns about health care costs in retirement.

A recent survey from T. Rowe Price finds that health care costs are the top spending concern of retirees. This comes as no surprise as some studies predict that a 65-year-old couple may need up to $400,00022 to cover health care costs in retirement. But these estimates don’t provide an accurate picture of what most retirees will encounter.

Such daunting numbers give an impression it will be difficult for most retirees to afford health care in retirement. We believe that planning for health care costs in retirement can be made simpler using the available assets and income retirees have. But we need to approach calculating health care costs differently.

Opening Quote Medicare premiums with prescription drug coverage account for nearly 75% of annual health care costs for the majority of retirees, regardless of the type of Medicare coverage they have. Closing Quote

When trying to plan for future health care expenses in retirement, consider these three things.

1. Health care is not a one-time, bulk expense.

In our view, approaching health care costs as an annual expense makes it easier to plan for. Any type of expense incurred over a 20- to 30-year period can look daunting when summed up. We might balk at the thought of prepaying an $86,000 cable bill in retirement,3 but that’s not how we pay for cable. Similarly, estimating cumulative future health care costs is not useful because we don’t prepay for health care.

2. Think about premiums and out-of- pocket expenses differently.

Premiums are relatively stable, but out-of-pocket expenses are not. Usually, retirees pay a fixed monthly premium, but out-of-pocket expenses can vary from month to month.

3. Don't get caught up on one large number.

Most of the estimates regarding retiree health care expenses assume a single type of coverage, which may differ from yours. Also, the astronomical health care cost numbers often correspond to a few unfortunate people who experience very high expenses for a prolonged period. Most retirees won’t be in that situation.

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Breaking Down Health Care Expenses in Retirement

Breaking Down Health Care Expenses in Retirement: Separating estimates for annual premiums and out-of-pocket costs makes planning easier.

T. Rowe Price estimates based on projected 2019 Medicare premiums and data from the Health and Retirement Study (HRS).

Fronstin, Paul and Jack VanDerhei. “Savings Medicare Beneficiaries Need for Health Expenses: Some Couples Could Need as Much as $400,000, Up From $370,000 in 2017.” EBRI Issue Brief, no. 460 (Employee Benefit Research Institute, October 8, 2018).

Assuming a $150 monthly cable expense with 3% annual inflation over 30 years.

This material is provided for general and educational purposes only and is not intended to provide legal, tax, or investment advice. This material does not provide fiduciary recommendations concerning investments; it is not individualized to the needs of any specific benefit plan or retirement investor, nor is it intended to serve as the primary basis for investment decision-making.

The views contained herein are those of the authors as of February 2019 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

All investments involve risk.

T. Rowe Price Investment Services, Inc., Distributor.

© 2019 T. Rowe Price. All rights reserved. T. Rowe Price, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.

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