Healthcare for Retirement: Four Numbers to Know

Zoe Team

Nov 30, 2018

5 min read

A financial advisor reviewing a plan with two clients at a table

Key Takeaways

Couples should budget ~$280,000 for total retirement healthcare costs.
Individual annual healthcare expenses can triple by age 85.
70% of 65-year-olds will require some form of long-term care.

Frequently Asked Questions

Does Medicare cover long-term care?

No, Medicare only covers short-term care events. Long-term care costs are typically paid out-of-pocket or via specific insurance policies and hybrid annuities.

What is the average cost of a nursing home room?

The average annual cost for a private room in a nursing home is approximately $100,000, though this varies significantly depending on the state.

Why is conscientious behavior important for retirees?

Conscientious behavior correlates with better health habits, which can help maintain physical health and keep rising healthcare costs more manageable in retirement.

Healthcare in Retirement: Four Numbers to Know

Health care costs can increase unexpectedly several years into retirement, so it’s important to work with a qualified retirement advisor who can develop a plan and stress-test the plan to help manage these uncertainties.

It’s flu season; did you get your flu vaccine in time? According to the CDC, about 47% of adults age 18 and up reported receiving the vaccine in 2018-2019, up almost 10% from 2011-2012. This seems low, considering so many people talk about getting the vaccine as a matter of civic duty. Co-workers and friends seem to brag as if by getting a shot, they have single-handedly stopped the flu in its tracks and that we as global citizens owe each other a warm bacteria-free hug of gratitude for making that trip to the doctor (or pharmacy).

Despite the tremendous social benefits of getting a flu shot and taking care of themselves during flu season, many people illustrate a potential lack of conscientiousness. Numerous studies including this one have shown that individuals who show conscientious behavior tend to also have better health habits, especially when it comes to diet and exercise, managing stress, alcohol and drug use, risky driving, smoking, and other factors. In many cases, these behaviors, along with other cognitive qualities, translate to better overall health and well-being which promotes longevity.

As individuals get closer to retirement, conscientious behavior could become more important not only for longevity purposes but also to help keep individuals healthy and their health care costs manageable in retirement. It is widely cited that health care costs are the fastest-growing costs for individuals in retirement. Over the past few decades, health care expenses in retirement have grown annually by about 5% on average, although the growth rate has slowed over the past decade. However, health care costs can increase unexpectedly several years into retirement, so it’s important to work with a qualified retirement advisor who can develop a plan and stress-test the plan to help manage these uncertainties.

Here are 4 numbers to be aware of when planning for health care costs in retirement:

1. $280,000 is how much the average couple should expect to spend on healthcare in retirement

According to the 2018 research from Fidelity, the average couple should expect to spend about $280,000 on health care alone in retirement. While the year-over-year growth in costs has slowed in recent years, consider that this represents a 75% increase since 2002; a couple retiring in that year could expect to pay about $160,000 for health care costs. Many of the factors that go into the cost determination for this annual study are based on market or economic changes and can vary drastically from year to year. Despite the variables, many people don’t have a gauge on how much health care costs can climb and tend to underestimate these costs. In the Fidelity study, 46% of the respondents believed that they would only need about $100,000 to cover health care costs in retirement, and almost half said they were dipping into personal savings in order to pay for health care.

2. $5,210 is the average out of pocket healthcare expense

Further research on this topic by JP Morgan Asset Management illustrates how costs may change during retirement. Their research revealed that the average 65-year-old retiring and signing up for Medicare in 2018 is likely to spend about $5200 a year initially on health care costs. This includes the cost of Medicare premiums, co-pays and other out of pocket health care costs not covered by Medicare and does not include long-term care (LTC) costs. The chart below illustrates how the annual costs are broken down among the different parts of Medicare, Medigap which is a separate policy individuals take out to cover costs and payments not covered by Medicare, and vision, dental and hearing which are also not covered by Medicare. For an individual in good health at age 65, this annual cost of $5000 seems reasonable.

However, consider that health care costs grow faster when you’re in retirement and based on the combined historical and projected growth rate of the different parts of health care, this same individual may see his annual costs more than triple to $18,000 by the time he turns age 85. These high costs may be tougher to manage once an individual is already well into retirement, so it pays to plan.

3. 70% of individuals aged 65 will need some form of LTC support

Beyond health care costs that cover the cost of hospitalization, doctor visits, tests, and medicine, many people in retirement develop conditions that are chronic, specialized and may be debilitating. Long term care (LTC) helps to support an individual’s management of their daily activities and lifestyle (also known as “ADLs”), which include bathing, dressing, transferring (moving from a bed to a chair), eating and caring for incontinence. Most insurance policies that provide LTC funding require an individual to be unable to complete 2 of the 6 ADLs in order to qualify for LTC insurance.

Long term care can vary from occasional home health visits by a health worker to long term nursing home care, so costs may vary from person-to-person, and these costs can be unexpected. Consider that 70% of individuals aged 65 will need some form of LTC support, and while 1/3 of retirees will never need LTC, 20% of individuals will need LTC for five years or longer.

Medicare pays for very short term LTC events and costs, so the primary source of funding comes from individuals in the form of self-insuring/paying for costs out of pocket or LTC insurance policies and hybrid annuities.

4. $100,375 is the average cost of long term care support

While many retirees may never need LTC support, and even fewer will set foot in a nursing home, consider that the average annual cost for a private room in a nursing home is about $100,000. These costs vary by state so a private room in Oklahoma may cost $63,500, but in Alaska, the same room will cost you over $330,000!

Retirement comes with uncertainties. Managing healthcare costs in retirement requires careful and conscientious planning. Consider working with a qualified advisor who can help you develop a plan that includes the appropriate inflation rate for health care costs, and can advise you on your long-term care planning options.

Healthcare in Retirement: Four Numbers to Know

Here are 4 numbers to be aware of when planning for health care costs in retirement:

1. $280,000 is how much the average couple should expect to spend on healthcare in retirement

2. $5,210 is the average out of pocket healthcare expense

3. 70% of individuals aged 65 will need some form of LTC support

4. $100,375 is the average cost of long term care support

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