Thrifty Thinking: How Rising Healthcare Costs Can Frustrate Your Retirement Dreams

Many Americans planning for retirement often overlook an important and potentially exorbitant expense that could upend everything.

Healthcare costs.

“When people think about how much money they might need in retirement, they tend to focus on routine monthly expenses,” says Clayton Alexander (www.retireteton.com), an investment adviser and founder of Teton Wealth Group. 

“But if you aren’t careful, the cost of healthcare could quickly eat up your savings, forcing you to adjust your retirement lifestyle.”

Recent research by HealthView Services reports that the average healthy 65-year-old couple who retire this year can expect to incur total lifetime healthcare costs of $387,644 in today’s dollars.

Alexander says it’s worth noting what that dollar amount does – and does not – include. It does include Medicare premiums, Medigap or Medicare Supplemental premiums,  dental insurance, and out-of-pocket costs related to hospitalizations, doctor visits, and drugs, among other items. 

The figure does not include long-term care, itself a potential huge expense that people nearing retirement need to think about and plan for.

As you near retirement and reflect on the impact of healthcare spending, Alexander suggests you consider the following:

• Rethink traditional views on how much money you need. At one time the conventional wisdom was that you would need less income in retirement than you needed while you were working; maybe 20 percent less. “Now some retirement specialists suggest you might need more,” Alexander says. In part, that’s because travel and entertainment expenses can go up in retirement as people have more free time. But Alexander says estimates also may overlook this key fact related to health spending: Your employer no longer will be covering a portion of your health insurance costs. The HealthView Services report notes that new retirees, who generally paid approximately 25% of their medical premiums during their working years, are often surprised by the cost of healthcare in retirement, when they are responsible for 100% of their premiums and expenses. 
• Don’t discount the longevity risk. People are living longer, which is certainly something to cheer about. But those extra years also mean extra expenses, including the amount of money that will need to be spent on healthcare, Alexander says. Oddly enough, healthy retirees could end up spending more on healthcare than unhealthy ones simply because they will live longer. The HealthView Services report gives this example: A healthy 55-year-old woman, who has a life expectancy of 89, will need to plan, on average, for $424,875 in lifetime healthcare costs (that’s future value, not today’s dollars). But if she has Type 2 diabetes, her life expectancy falls to 80 and projected total costs would be $266,163.
• Start planning – now. Inflation affects healthcare costs just as it does everything else, so it’s never too soon to start planning, Alexander says. It’s also important to remember that, unlike some expenses in retirement, spending money on healthcare is a necessity, not a luxury. “If you aren’t prepared,” he says, “you’ll have to cut back in other areas, which could mean your retirement won’t be the wonderful time you envisioned.”

“If you’re a few years away from retirement, the good news is that there’s still time,” Alexander says. “You and your financial professional can review your retirement income sources and expenses, and come up with a plan to offset what your healthcare costs could potentially be in the future.”

About Clayton Alexander

Clayton Alexander (www.retireteton.com) is an investment adviser and founder of Teton Wealth Group. A graduate of Dixie State University with a B.A. in Business, Alexander also has spent time working at Northwestern Mutual and Goldman Sachs. He currently holds his life, health and Series 65 securities licenses. Alexander focuses on building holistic retirement plans. As a fiduciary, he has developed the four-step Ascent Plan – a system to help clients gain clarity and perspective on creating a financial plan for safe, secure and tax-efficient retirement income and estate transition.