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“How much will I need to Budget for healthcare costs when I retire?”

When I sit down with people who are preparing for retirement, one of the most significant topics we end up wading through is their potential healthcare cost.  Many have significant concerns that they will bankrupt themselves paying for their medical expenses.   Even curriculum required by groups like the Certified Financial Planner Board of Standards™ have been designed to prepare us for a world in which healthcare costs could be the largest expense in retirement.

Despite the above average inflation we’ve seen affect healthcare costs and the illustrations pre-programmed into your advisor’s financial planning software, you may find that visiting your doctor is more affordable than we like to think.  Let’s take a look at some actual numbers.

What does healthcare actually cost?

In 2018, the Employee Benefits Research Association published a study exploring the out-of-pocket healthcare expenses for retirees (click here to access the study).  The study uses actual data reported by participants, all of whom were over 70.  Interestingly, most of the conclusions we’ve drawn has used a substantial amount of hypothetical modeling as opposed to real world data.

The results are actually quite shocking.  The data results essentially make a bell-curve in terms of cost.  Most people spend a relatively small amount on healthcare.  From age 70 until death (post age 95), the median out-of-pocket cost was a mere $27,000.  That’s only about $1,000 PER YEAR!  What’s more, half of the population spends less than that. 

This becomes challenging because half the population spends more than $27,000. If you’re in the top 10% of people with expensive medical care, you’ll spend more than $96,000 from age 70 until you pass away sometime after your 95th birthday.  Based on these numbers, healthcare probably won’t be the challenge we anticipated since 89% of us spend less than $320/month on these expenses.

What about Assisted Living Costs?

The study showed that for those who are the most expensive (the top 10%) nursing care can add more than $175,000 over the course of your lifetime.  While women proved to be about 28% more than men, and were much more likely to enter into nursing care, most people spent very little or no money on these services.  A surprising 54% of those who passed away after age 95 never used nursing care at all.

What does it mean for you?

As with most statistical studies, we need to filter out some of the noise so that we can make practical sense of these numbers.  Fortunately, the EBRA did some of the work for us.  When you adjust for skewness in the data-set and accounted for the participants receiving Medicaid for their assisted living costs.  The average person spends about $2,000 per year on healthcare (including nursing care).  If you’re in that top 10%, you’ll be spending $11,000 or more each year.Financial planning for healthcare costs should be a “prepare for the worst, but plan on the average” type of scenario. Your financial plan should prepare you for the higher costs you could encounter by maintaining flexibility in both objective and quantity of capital, but shouldn’t excessively constrain you from pursuing your passion in life. If you’re preparing for retirement, reach out to Co|Create Financial.  Let’s begin creating a future together today!