How to Factor in Health Costs into Your Retirement Planning

Boomers planning on relying on just Medicare to cover their health-care costs in retirement better think again.  

With health care costs rising two to three times faster than inflation over the last few decades, baby boomers in retirement are facing unplanned medical costs that are eating up their nest eggs.

Fidelity Investments, which has been tracking retiree health care costs for over a decade, estimates that a 65 year old couple retiring this year will need $240,000 to cover future medical costs. While Medicare can help cover some costs, it won’t cover deductibles and copayments, prescriptions and premiums for supplemental coverage.

Based on the Wellness for Life survey released by life insurance company Aviva USA and the Mayo Clinic, Americans aren’t prepared for the financial blow of a health-care problem. The survey shows 9 out of 10 Americans underestimate health-care costs in retirement.  The survey polled non retired U.S. adults.

Chris Jones, chief marketing officer for Aviva USA,  offered these additional  findings related to the survey for our boomer readers:

Boomer: What improvements in lifestyle habits would you suggest to decrease health and financial risks?

Jones: Our results show Americans need to take small steps to improve their physical and financial health. For example, two out of three people surveyed exercise less than two hours per week. One in six survey respondents said they go to the doctor less frequently than once every two years. Only half of those surveyed said they have a plan to achieve their financial goals.

Life is a series of small decisions that take you down a path. Sometimes we just need to take a step back and see that some small changes in the decisions we are making today – such as getting regular preventive care, improving lifestyle habits and making a financial plan – could help us in the future. So the call to action from this survey is to do things today that could lead to improved health and a less-stressful financial future.

Boomer: Why do people underestimate health care expenses in retirement and how can they be better prepared?

Jones:  Many people would struggle to say exactly how much they need to save to retire, so it’s probably not too surprising they haven’t thought much about the cost of individual expenditures in retirement, like health care. Seven out of 10 people surveyed expect to spend just 10% or less of their retirement income on medical and dental costs, and nine out 10 expect to spend less than 20%. In reality, people should be prepared to spend approximately 30% of their income on health care expenses in retirement, according to The Urban Institute.

I can’t speak to exactly why people underestimate these costs, but I think it is related to the overall insufficient financial planning. We always say speaking with a financial services provider is a great first step toward financial health, just like seeing a doctor is an important first step to better physical health.

Boomer: Do Americans feel they are prepared for retirement?

Jones:  Not at all. Only four of 10 people surveyed said they are, or will be, financially prepared for retirement. Only half the people surveyed said they have a plan to achieve their financial goals, while half said they sometimes get overwhelmed just thinking about preparing their finances for retirement. We think that working with a financial advisor is a great first step to address those concerns. An advisor can help people assess where they are, set realistic targets and implement a plan to work toward their goals. The majority of us will live to retirement age and beyond, so there’s no time like the present to start to prepare for it if you haven’t already.

Boomer: How much will retirees rely on Social Security during their golden years?

Jones: It was interesting to me that 44% of respondents said Social Security will be a very important part of funding their retirement. Part-time work and home equity are both listed by one in five as important sources of funding their retirement.

To me, none of those are really sources you can count on to fund your retirement. We also think a life insurance policy, like our Wellness for Life program, offers unique benefits that should be part of everyone’s long-term financial plan.