For years now, firms in the financial services industry, as well as researchers, have been scaring preretirees into thinking they need an ungodly amount of money set aside at age 65 to pay for years of healthcare costs in retirement.
“I think there is a lot of focus on the big, scary numbers without a good understanding of who or how many retirees are likely to spend such large sums,” said Sudipto Banerjee, vice president of retirement thought leadership at T. Rowe Price. “A few retirees spend a lot on healthcare for sure, but most don’t. Focusing only on the large numbers creates a distorted picture of healthcare costs and creates fear among retirees. I think part of this fear is manifested in underspending in retirement.
According to a paper published in the Retirement Management Journal , the average annual healthcare expenses for all retirees ages 65-94, excluding long-term costs, are roughly $4,500, or 15% of total spending. So, there you have it: the average person will spend around $5,700 in today’s a year for premiums and out-of-pocket expenses.
Others agree. Basic healthcare expenses, the authors of the Retirement Management Journal paper wrote, “can be budgeted and planned for effectively because the variability of spending is manageable, particularly for retirees with supplementary coverages.” Preretirees also need to think about other resources to possibly pay for healthcare expenses in retirement, including a reverse mortgage and the cash value in their life insurance policy.As for out-of-pocket costs, Banerjee also notes that such costs are a smaller share of overall healthcare costs, but the variation in out-of-pocket costs is very high. Given that, supplemental insurance such as Medigap policies might help to keep those out-of-pocket costs in check, he noted.
While most healthcare costs can be planned for through proper retirement income planning, there’s an open question about planning for and paying healthcare shocks and non-diversifiable risks. In other words, consider purchasing an annuity to manage the risk of longevity and long-term-care insurance for long-term care costs.