Healthcare in retirement is one of the most talked-about topics in financial planning, often stirring fear with dramatic headlines. You may have heard that you’ll need hundreds of thousands of dollars set aside just for medical expenses in retirement. But what do those numbers really mean for you? And how can you make sense of them in a way that helps you plan, not panic?
Big Differences
Headlines citing research purporting hundreds of thousands of dollars in required savings is needed for retiree healthcare alone can easily instill fear. But these numbers are not all created equal. For example, Fidelity’s 2024 Retiree Health Care Cost Estimate says a healthy 65-year-old individual will need about $165,000 in savings to cover healthcare throughout retirement. This assumes enrollment in traditional Medicare with Medigap Plan G and a Part D prescription drug plan. This reflects the future value of anticipated costs, meaning they represent what you might cumulatively spend over 20 to 30 years or more—not what you need in your bank account the day you retire.
Milliman, a leading international actuarial and risk management firm, provides similar estimates but notably different dollar amounts in their 2024 Retiree Health Cost Index. According to their data, a 65-year-old man enrolled in traditional Medicare with supplemental coverage could need around $281,000, while a woman could need $320,000. The differences between Fidelity and Milliman are steep and largely stem from the breadth of healthcare services included and the actuarial assumptions regarding life expectancy, health status, and future healthcare inflation.
Digging deeper into the Milliman study, these total spend estimates are reduced by more than half if moving to a different Medicare plan assumption: replacing traditional Medicare and Plan G with a Medicare Advantage plan. Or if you look at costs by state where you retire, Milliman finds that Florida is nearly 50% higher than average for total spend estimates when using traditional Medicare but is among the lowest-cost states if a Medicare Advantage plan is substituted.
While Medicare Advantage plans may offer significant savings over traditional Medicare plans, there are tradeoffs. Perhaps most notably, Advantage plans require prior authorization for some services, especially higher-cost ones like inpatient hospital stays, skilled nursing facility stays, and chemotherapy. Denials can occur, and while you can appeal, it can lead to delays in receiving necessary care.
No Lumps
While these big dollar headlines and sizable variances may have you feeling you are taking your lumps, let’s investigate further.
One of the most important things to understand about these large dollar figures is that they are not up-front costs. You are not going to hand over $165,000 the day you retire to prepay for your healthcare. Instead, you’ll pay these costs incrementally—month by month, year by year—like when working.
Further, Boston College’s Center for Retirement Research (CRR) estimates that retirees will be responsible for about 22% of their lifetime healthcare costs out-of-pocket or costs not covered by insurance. This helps further refine costs into a fixed category (insurance premiums) and a variable category (out-of-pocket expenses). You can reliably plan your premium expense after making decisions related to your plan selection between traditional Medicare or Medicare Advantage plans and supplemental plans. Then you can apply a reasonable inflation factor to project these more so fixed expenses. The variable component, however, is less certain.
Variable, out-of-pocket costs are largely comprised of copays, prescriptions, dental work, or unexpected procedures. For variable costs, consider a cushion in your spending plan. If you suffer from a chronic condition or other health condition, increase the size of the cushion. The good news, relatively speaking, is that high variable costs are not as bad as most fear, generally limited in duration, and predominantly in late stages of life.
Conclusion
Healthcare in retirement is more complex than most would perceive. Choices are many and cost estimates may vary widely. While the fear of making bad decisions is legitimate, the fear need not be insurmountable.
Understanding how to accurately estimate and project your costs over time is important. This level of understanding is uncommon even among Certified Financial Planner® Professionals. While general data may be a starting point, it falls far short of being sufficient. Customizing your estimates based on your health, plan preferences, location, and other factors is prudent.
And don’t let those big lump sums scare you. Think monthly. Plan annually. Account for inflation realistically and choose a Medicare path that aligns with your health needs and financial goals.
With a thoughtful approach, good insurance agent, and competent advice from an informed CFP® Professional, you can handle retirement healthcare expenses one manageable month at a time.
