Health care costs in retirement are a primary financial concern for investors

When helping clients prepare for retirement, are you discussing potential healthcare costs with them? Historically, retirement planning has been less concerned with this figure and more concerned with market performance and inflation as assumptions in a plan. While recent research by Fidelity has shown that Americans are becoming increasingly concerned with potential healthcare costs, they are also dramatically underestimating what those costs will actually be.

According to the research:

  • 47% of investors said that health care costs in retirement were a major concern1
  • More than 50% of health care costs may be underestimated2
  • Retirees expect to only spend $50,000 to cover retirement health care costs2
  • $260k is the estimated amount of health care expenses the average couple will spend in retirement3

Traditionally, clients assumed that Medicare would cover the vast majority of healthcare costs. But according to the Employee Benefit Research Institute (EBRI), a 65-year-old couple with median prescription-drug expenses who retired in 2017 would need $226,000 to have a 70 percent chance of being able to pay all their remaining lifetime medical bills and $273,000 to have a 90 percent chance.

Although Medicare covers most major costs (with the exception of vision and dental care), the associated out of pocket costs—like monthly premiums for certain program components, deductibles, and co-pays—can quickly add up. A “Medigap” supplemental policy can be purchased to cover many of these “out of pocket’ costs, but one thing this type of policy does not cover are the potentially significant costs associated with long-term care.

Each client’s individual financial circumstances are as different as their health. There is no cookie cutter approach to planning for a client’s healthcare costs in retirement. We believe that the planning process should always include an appropriate retirement “stress test”, which looks at multiple healthcare related variables.

Here are some health care cost considerations when delivering a retirement plan for your clients :

  • Rising healthcare costs dramatically outpace inflation
  • Self-funded health insurance needs to be accounted for with early retiree’s
  • Start with national averages for cost and round up if clients family history warrants
  • Consider a dedicated account invested accordingly for these costs
  • Medigap premiums need to be assumed
  • Long-Term Care costs and potential insurance coverage should be reviewed
  • Health Savings Accounts (HSA’s) can provide a pre-tax vehicle to save for the future


Sources: 1Fidelity 2015 Survey of Investors at Retirement; 2Fidelity HSA Survey; 32016 Fidelity analysis

Written By

Matthew is head of financial planning at eMoney Advisor and is a Certified Financial Planner™.