Healthcare CostsRetirement

Health Care Costs in Retirement, how much are they going to be really?

By August 30, 2014 No Comments

On the hearts and minds of many people in and heading towards retirement is the concern about what health care will really cost them in the future and if it will be as high as it is being predicted.

This concern is merited since up until very recently the thought of planning for any health care costs in any fashion was non-existent. According to a recent survey by Sun Life less than 8% of the US population has ever planned for their own health costs in any financial plan, let alone their retirement.

But, with the recent enactment of the Affordable Care Act coupled with the largest segment of the US population, the Baby Boomers, starting to retire the subject is now receiving some attention and rightly so as health insurance is something everyone must have.

So how much are health costs in retirement really?

The answer, unfortunately, really depends on the person and their own situation, but if we were to take a 65 year old person, who was no longer enrolled in an employer health plan, who was eligible for Medicare, who wanted to be “fully insured” throughout retirement and planned on living until 85 then the costs can be calculated.

In 2014, the costs of health coverage for a retiree through Medicare is fairly simple to calculate:

  • Medicare Part A – for those that qualify there is no premium as it was met through employment.
  • Medicare Part B – for those whose income is under the Medicare Income-Related Monthly Adjustment Amount (IRMAA), their premium will be $104.90 per month ($1,2458.80 annually)
  • Medicare Part D – on average (depending on your residency, health and income) the premium on the national level is roughly $54.00 a month ($648 annually). This does not include any co-pays or deductibles.
  • MediGap Plan F policy – on average (depending on gender, age & residency) the premium on the national level is roughly $181.00 a month ($2,172).

The total cost for a 65 year old person retiring today, without considering age, residency, gender or income, is roughly $4,078.80.

For a couple, we can easily just double this number, though it is not advised as women tend to have lower health costs for MediGap Plans, depending on their residency, so the possible expected costs for this couple is about $8,157.60 in just premiums for the year.

From here it all comes down to what the rate of inflation will be going forward, since we are planning until they reach the age of 85 and please remember, we are not placing any other considerations into the equation at all.

What is the rate of inflation for health costs in retirement?

Unlike Medicare costs, this particular question is not as easy to answer as there are many different ideas floating around on what it exactly is.

The first place we can look to is the federal government as it has been controlling these costs for years through Medicare and even Medicaid (the federal government is responsible for helping individual states fund this coverage).

According to the Center of Medicare and Medicaid Services (CMS) in its “National Health Expenditure Projections” the rate of health costs on average is expected to be 6.2%.

At this inflation rate this would place the couple’s out of pocket health costs to be about $333,790.30 for just their Medicare premiums.

The next place we may want to look at is Fidelity Investments. Fidelity has been advertising that the total expected out of pocket costs for a couple throughout retirement is projected to be about $220,000.

With this amount of $220,000 coupled with what we know about current Medicare costs, the rate of inflation can easily calculated to be around 2.43%.

Please note that Fidelity, in order to reach this $220,000 number is only expecting the male to live until age 82 while the female is expected to live until age 85. With this time frame the inflation rate jumps up to close to 3.7%.

The third possible place we could find an inflation rate for health care is the Boston College Center of Retirement where Alicia Munnell, a professor of management sciences at Boston College, and director of the college’s Center for Retirement Research stated in a recent Bank Investment Consultant article that “a typical couple currently 65 years old could expect health care costs over their lifetimes, excluding long-term care, to run about $191,000 (with a 5% chance of exceeding $311,000)”

Again, knowing the current Medicare costs for a couple retiring today, $8,157.60, in order to only have the costs through age 85 be $191,000 the rate of inflation would have to be about 1.1%, which is great news as this rate is well below the average rate of inflation of everything.

For those unlucky 5% that Ms. Munnell mentioned, their inflation rate would be closer to the federal government’s number which is about 5.6%.

Now, who should we go with?

  • CMS’ own projections of 6.2%
  • Fidelity Investments targeted rate of 2.43% to 3.7%
  • Boston College Center for Retirement Research’s 1.1% for 95% of the population and 5.6% for the unlucky chosen ones.


Before we answer this difficult question, should we throw in another possibility, like say, what we know has happened for the last 48 years, along with what the Medicare Board of Trustees suggests is going to happen?

Well if we do happen to go along with past performance, which is no guarantee of future results as well as the Medicare Board of Trustees own projections we would quickly realize that the inflation rate for Medicare, on average, has been over 7%.

If we take the word of history and Medicare then the average 65 year old couple could expect to incur close to $351,000 in health costs for JUST THEIR MEDICARE PREMIUMS.

As you can tell, health care costs should be a concern and they should be planned for as they just may be more costly than what the financial industry is projecting, especially if we go by what the federal government and history is telling us.

For more information on health costs will impact your retirement and for a quick calculation what those costs may be we invite you to try our software at www.yourretirementcosts.org

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