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What Your Clients Need to Know About Health Care Costs in Retirement
The headlines can be scary. But helping your clients understand the realities can ease their anxieties.
Many people worry that health care costs in retirement will be overwhelming. It’s no surprise, then, that two of the top three concerns retirees have about expenses are out-of-pocket health care expenses and health insurance premiums.1
These worries reinforce the idea of a “big scary number” for health care costs in retirement—a number seemingly big enough to derail the best-laid retirement plans.
Health care is far more financially manageable than it’s made out to be.
Yet research by T. Rowe Price2 shows that “health care is far more financially manageable than it’s made out to be,” notes Stuart Ritter, vice president, Insights Director. Sharing this research with your clients provides a unique opportunity to differentiate your practice and guide clients toward more realistic health care and financial strategies.
Well-publicized estimates are misleading
Some well-publicized estimates peg medical costs in retirement at $383,000.3 It’s enough to make anyone stand up and take notice. That said, this number, and the way it’s framed, is misleading in several key respects:
- It’s presented as a lump-sum figure, which is not how medical expenses tend to be realized. (They’re spread out over many years.)
- While a small fraction of the population will encounter significant health care costs in retirement, the majority won’t incur this $383,000 amount.
- Health care isn’t even the biggest expense for most retirees—it’s housing.
Think health care is the largest expense for retirees? Think again
Housing is the biggest annual cost for retirees age 75+
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.
Comparing younger retirees (age 65–74) to older retirees (age 75-plus) reveals additional insights.
- Health care makes up 12% of the spending for younger retirees versus 16% of the spending for those 75-plus.
- But that percentage change is misleading—older retirees spend only $100 more per year compared to younger retirees.
- The percentage increases because total spending for older retirees decreases—and that lowering of the denominator increases the percentage of spending related to health care.
Actual health care costs for most retirees are less alarming
When you dig into health care costs for people in retirement, the numbers are less alarming. In any given year, the median total health care cost for a retiree is $3,600. At the 95th percentile, this number is $11,800.4
It’s also important for your clients to understand how these costs are broken into fixed versus variable costs.
How health care costs are split
Medicare Parts A, B, and D
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.
- Fixed expenses (primarily Medicare premiums) account for 73% of annual medical costs and are fairly stable and predictable.
- Variable expenses, on the other hand, are unpredictable out-of-pocket costs and account for the remaining 27% of annual medical spending.
- Only a small percentage of people will experience large variable expenses in a given year. For most people in their 60s through their 90s, annual variable health care costs are reasonably low, with a median of $800 annually.
RELATED RESOURCES
Planning for Retirement Health Care Costs
Tools and resources to help better understand and plan for health care costs in retirement.
Help your clients understand the reality
While helping your clients plan for health care costs is an important part of a holistic retirement plan, it should not be a source of anxiety. Health care costs during retirement are not a big scary number nor a one-time, lump-sum cost. They’re not even the largest expense for most people—that would be housing. Most health care costs in retirement are fixed, and they’re generally quite manageable. This reality may not grab headlines, but it should help your clients sleep better at night—while at the same time providing you with a unique opportunity to guide them toward a more realistic and rewarding financial strategy.
1 T. Rowe Price Retirement Savings and Spending Study, 2022.
2 Sudipto Banerjee, T. Rowe Price, A New Way to Calculate Retirement Health Care Costs
3 Spiegel, Jake, and Paul Fronstin, “Projected Savings Medicare Beneficiaries Need for Health Expenses Remained High in 2022: Some Couples Could Need as Much as $383,000 in Savings,” EBRI Issue Brief, no. 580 (Employee Benefit Research Institute), February 9, 2023.
4 Source: T. Rowe Price estimates based on projected 2023 Medicare premiums and data from the Health and Retirement Study (HRS). All costs are rounded to the nearest hundred. 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
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