Subscribe For Updates

Retiree Healthcare Expenses (Part 1)

This post is the first of a three-part series on retiree healthcare expenses.

Part 1: Drivers of Retiree Healthcare Expenses
Part 2: Understanding Medicare
Part 3: Factoring in Long-term Care

We are often asked during retirement planning engagements how we estimate retiree healthcare expenses. It’s an important question because healthcare can consume such a large portion of many retirement budgets. What’s more, healthcare expenses can vary wildly. On the low end, some retirees spend as little as $1,500 – 2,000/year (including Medicare premiums), while on the high-end it can be well over $20,000 (and that’s excluding long-term care costs, which we will look at separately in a subsequent post in this series).

So, the question is, how does one narrow down this range and more accurately predict healthcare expenses? Let’s look at four key factors that help us do just that.

  1. Health Status

One’s health status is the biggest determinant of healthcare expenses in retirement (or any time, really). In 2018, The Vanguard Group and Mercer Health and Benefits published a study that looked at the impact of 12 chronic conditions on total healthcare expenditures: hypertension, high cholesterol, arthritis, heart disease, diabetes, kidney disease, depression, Alzheimer’s, COPD, cancer, asthma, and osteoporosis. Not surprisingly, the more chronic conditions, the greater the healthcare costs. Additionally, a history of smoking was another major factor in predicting longer-term costs. It is critical to understand how health factors can impact the quantity and type of health care services a given person will consume throughout retirement.

  1. Income

Not many people realize this, but Medicare is means-tested. The higher your income (modified adjusted gross income, or “MAGI,” to be precise), the more you pay for Medicare part B and part D premiums. The additional amount above the baseline premium for having a higher MAGI is known as an income-related monthly adjustment amount, or “IRMAA.” This differential can be significant.

The IRMAA for part B can be up to $3,900, and the IRMAA for part D can be up to $928.80, adding nearly $5,000 to the baseline Medicare premiums of about $2,500 (depending on your prescription drug plan). Bear in mind that this is per person!

  1. Insurance Coverage

Just because two retirees are both covered by Medicare doesn’t necessarily mean that coverage will be the same. While this might be true for Medicare parts A and B, it can differ for the plethora of prescription drug plans as well as whether someone selects a Medicare Advantage plan or a supplemental Medigap policy to pay for many expenses not covered by Medicare. It is important to assess the level of coverage that someone is likely to need, based on their health profile and other factors (e.g., do they plan to travel extensively?), and then incorporate the relevant insurance premiums for part D and either part C or Medigap.

On top of this, you must look at and budget for non-covered (or partially covered) health expenses, such as vision, dental, and hearing aids. These are major contributors to the vast range of total healthcare expenses.     

  1. Location

The last factor impacting healthcare expenses for retirees is the geographic location. Healthcare costs vary dramatically in different parts of the country, often stemming from access (or lack thereof) to specialists in different regions. And while geography does not affect Medicare part B premiums, it may affect part D premiums, part C premiums, Medigap policy premiums, and long-term care expenses. Some of the difference is due to variation in the cost of living and the level of federal funding. The rest is from differences among the insurance providers that serve each state.

Adding it all up

According to the Boston College Center for Retirement Research, the average retiree spends $4,300 for their total healthcare expenses (premiums plus all other out-of-pocket spending) each year. Averages can be a good starting point to get a general sense for what you might expect to spend, but they simply aren’t enough when you need to forecast for a specific individual’s future healthcare expenses. Using the four drivers—health, income, coverage, and location—can provide a much more accurate picture of what to expect and can further inform decisions such as which insurance plan to select or whether to invest in long-term care insurance.

Picture of Mark Haser, M.B.A., CFP®
Mark Haser, M.B.A., CFP®
Mark is a Partner and Wealth Advisor with Artemis Financial Advisors LLC. He has an MBA from Boston College’s Carroll School of Management and is a Certified Financial Planner (CFP®) professional. Mark helps physicians and high-income families to optimize their cash flow, minimize taxes, and build a plan for long-term financial success.

Subscribe For Updates

Related articles