Health Care

Planning for Retirement Health Care Costs

Most health care costs in retirement can be successfully addressed in a holistic financial plan.

Health Care

Planning for Retirement Health Care Costs

Most health care costs in retirement can be successfully addressed in a holistic financial plan.

The predominant narrative around health care costs in retirement is that they are overwhelmingly large, which can lead to avoidance.

However, our research has shown that these costs can be effectively planned for and the conversation about health care costs need not be as scary as previously thought.


Retirement Expenses*


Americans age 75+ 

Retirement Expenses Pie Chart

Break down the costs

A good first step toward helping clients understand health care costs in retirement is to break them down into fixed and variable expenses**:

73% of expenses go to premium costs

Fixed costs: Primarily Medicare premiums

  • Constitute the bulk of health care expenses for the average retiree
  • Are relatively stable, predictable, and less risky
  • Are incurred monthly and can be budgeted for, similar in nature to an internet or utility bill

Variable costs: Modest out-of-pocket costs and unexpected one-off shocks

  • Typically a much smaller share of overall health care expenses for most retirees
  • Frequency and size of shocks can vary widely. Only a small number of people will have a very high health care expense shock in any given year.

Total annual health care costs are lower than you think

To illustrate the health care expenses you could potentially pay each year, imagine a deck of playing cards. You could fall anywhere on this cost spectrum in any given year.
 

TOTAL ANNUAL RETIREE HEALTH CARE COSTS**

Deck of Cards

Understanding the differences in health care savings options

There are a number of tax-advantaged ways to save for health care expenses in retirement. We aim to provide financial professionals and their clients with a fair and balanced review of savings strategies, and an understanding that there is not a perfect solution. If done well, incorporating future health care costs in retirement planning can inspire confidence and help remove a major barrier to having peace of mind in retirement.

Understand the Differences in Health Care Savings Options

Reflects Roth and pretax employer-sponsored plans (as opposed to IRAs) unless noted. Advantages of account type (relative to the others) shown in blue. These are not the only options when it comes to saving for health care and/or medical-related expenses in retirement. Note that while HSAs are structured for the individual to save or invest for health costs, this is not the intended primary purpose of a defined contribution plan or IRA. Individuals should evaluate their health coverage needs and other factors before seeking tax benefits of an HSA. Source: HSAs are only available if you are covered by a high deductible health plan. IRS documents.

1 Federal income taxes. State laws vary. HSA contributions through an employer may be excluded from FICA taxes.
2 Once you reach age 59 ½ with an account that has been opened for at least five years, you may qualify for tax-free withdrawals of both Roth contributions and any accumulated earnings.
3 HSA distributions are considered qualified if they are used to pay for Qualified Medical Expenses (QME).
4 Penalties end at age 65 for HSA and generally at age 59 ½ for Roth and Pretax. Distributions of contributed assets from Roth accounts are tax- and penalty-free. Early distributions from retirement plans or IRAs may be subject to taxes and penalties unless an exemption applies. HSA distribution penalty is applicable to distributions that are not used to pay for Qualified Medical Expenses (QME).
5 The SECURE 2.0 Act of 2022 was signed into law in late December 2022 and changes the Required Minimum Distribution (RMD) age to 73 for individuals who turn 72 on or after January 1, 2023. By April 1 following the year you reach age 73, you must begin to withdraw a certain amount of money annually from your pretax retirement account(s). If you are still working with the company that sponsors your plan, you may be allowed to delay your first RMD until the April 1 following the year in which you retire. For each year following the year you reach your RMD age (or retire, if later—as applicable) the deadline is December 31.  The SECURE 2.0 Act of 2022 provides that the RMD age will change again to 75 in 2033.

Strategically address health care with clients

Differentiate your practice by helping clients prepare for future health care expenses as part of a broader discussion around retirement savings.

Presentation Key Takeaways

Planning for Health Care Key Takeaways Cover

Financial Professional Presentation Handout

Health Care Financial Professional Handout

Employer Presentation Handout

Health Care Employer Handout
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Variable Annuity

* Source: U.S. Bureau of Labor Statistics, Table 1300 Age of reference person: Average annual expenditure means, shares, standard errors, and coefficients of variation, Consumer Expenditure Surveys, 2021.

** Source: T. Rowe Price estimates based on projected 2023 Medicare premiums and data from the Health and Retirement Study (HRS). Health and Retirement Study, public use dataset. Produced and distributed by the University of Michigan with funding from the National Institute on Aging (grant number NIA U01AG009740). Ann Arbor, MI. Costs are for retirees covered by Traditional Medicare (Parts A and B) and a Prescription Drug Plan (Part D) and are rounded to the nearest hundred.

202310-3147469

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