personal finance |  september 25, 2020

Planning for Unexpected Health Care Costs in Retirement

While the majority of retirees won’t experience a shock, everyone needs to plan for it.


Key Points

  • Even though the fear of a health care shock is pervasive, very few retirees experience a catastrophic one.

  • The likelihood of experiencing health care shocks increases with age, particularly after age 80.

  • Very few retirees saw a permanent increase in health care costs after having a large health care expense.

  • Because health care expenses tend to increase with age, we offer guidelines for how much a retiree might need for annual out-of-pocket expenses at different ages.

Sudipto Banerjee, Ph.D.

Vice President, Retirement Thought Leadership

One of the unpleasant certainties of life is that everyone’s health will decline in old age. Unfortunately, no one knows how that will unfold.

Someone might live a long and healthy life and have a slow and natural decline in health. Others might get diagnosed with a sudden terminal illness or have one or more chronic conditions, like diabetes or dementia, requiring prolonged care. In addition to these possibilities, there are the risks of injuries from accidents and falls.

But no matter what path a retiree’s health takes, one thing is fairly certain—everyone will experience some level of health care costs during retirement. It’s easier to plan for some of these costs, such as health insurance premiums and recurring prescriptions.

But while the routine costs of health care can be burdensome, retirees are more concerned about an unexpected large medical bill.

A number of recent studies (Banerjee, 20181; Poterba, Venti, and Wise, 20132) have shown that retirees are not spending down their assets as one might expect. Retirees may be hesitant to spend their hard-earned money out of fear or in preparation for these health care expenses.

In order to help retirees create a successful retirement income strategy that balances the need for current spending and future health care expenses, we need to better understand the likelihood and the magnitude of these uncertain health care costs.

This paper will explore the probability that a retiree will experience a health care-related financial shock and the chances of the higher expense becoming a new normal, resulting in higher future expense. We will also look at how gender, age, and income play a role, if any.

What Is a Health Care Shock?

There is no settled definition of what amount constitutes a health care expense “shock.” While dollar increases provide an accurate measure of the intensity of change, they don’t always capture the full extent of how a shock can affect someone’s finances.

For example, consider an annual increase from $500 to $1,500 and another from $5,000 to $6,000. Even though both are equal in dollar terms, the first represents a 200% increase, while the latter is a 20% increase. A higher percentage increase could present a very difficult situation for low-income retirees living on tight budgets—even if the dollar increase is not particularly high.

While “shock” is all relative to one’s financial wherewithal, for our purposes, we focused on out-of-pocket health care cost increases of $2,000 or more during a two-year period.

What’s Included in These Health Care Costs?

Sudden large increases in health care costs are usually associated with out-of-pocket costs. These include out-of-pocket costs associated with:

  • Hospital stays

  • Nursing home stays

  • Doctor visits

  • Dental services

  • Outpatient surgery

  • Prescription drugs

  • Home health care

  • Usage of special facilities (e.g., adult day care, physical therapy, social worker, transportation for elderly, etc.)

  • A catchall “other” category

Incidence of Health Care Cost Shocks

While the fear of experiencing a health care financial shock is pervasive, only a very small share of retirees actually experience such catastrophic shocks.

Figure 1 shows the percentage of Americans ages 60 to 99 who experienced a health care shock. Over two years:

  • 10.8% experienced an increase between $2,000 and $5,000,

  • 8.4% experienced an increase between $5,000 and $25,000, and

  • Only 2% experienced an increase of $25,000 or more.

A larger proportion of retirees experience health care shocks when measured in terms of percentage increase in health care costs, rather than in absolute dollars.

(Fig. 1) Incidence of Health Care Shocks (Dollar Increase)

Increase in out-of-pocket medical expenses over a two-year period for individuals ages 60–99

This bar chart looks at Percentage of Retirees vs Dollar Increase in Health Care Expenses. A range of  $2,000 and <$5,000 in terms of dollar increase is at 10.8% of retirees; a range of  $5,000 and <$10,000 in terms of dollar increase is at 5.2% of retirees; a range of  $10,000 and <$25,000 in terms of dollar increase is at 3.2% of retirees; and a range of  $25,000 in terms of dollar increase is at 2.0% of retirees.

Source: T. Rowe Price calculations from the Health and Retirement Study (HRS), 1992–2014.

About Our Study

We used data from the Health and Retirement Study (HRS), which is a nationally representative survey of Americans ages 50 and older. HRS has interviewed its respondents every year starting in 1992. We looked at people who were between 60 and 99 years old from 1992 to 2014. All costs are adjusted for medical inflation and expressed in 2014 dollars.3 Since the survey is conducted every two years, respondents report their out-of-pocket health care costs for the preceding two years. As a result, the increases reported are for two-year periods.

1Sudipto Banerjee, “Asset Decumulation or Asset Preservation? What Guides Retirement Spending?” EBRI Issue Brief, no. 447 (Employee Benefit Research Institute, April 3, 2018).
2Poterba, James, Steven Venti and David A. Wise, “The Drawdown of Personal Retirement Assets: Husbanding or Squandering?”, January 2013.
3Medical inflation adjustment done using Consumer Price Index for All Urban Consumers (1982-1984=100), Medical Care, Table: CPIMEDSL, Federal Reserve Bank of St. Louis.

Important Information

This material is provided for general and educational purposes only and not intended to provide legal, tax, or investment advice.  This material does not provide recommendations concerning investments, investment strategies, or account types; it is not individualized to the needs of any specific investor and not intended to suggest any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this material.

The views contained herein are those of the authors as of September 2020 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

All investments involve risk. All charts and tables are shown for illustrative purposes only.



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