The New Finance Of Longevity

Retirement Planning: How Much Money Will You Need To Cover Your Healthcare Expenses?

A healthy 65-year-old will spend on average between $137,000 and $300,000 on healthcare costs in retirement

Milliman’s 2022 Retiree Health Cost Index includes key differences in coverage between Medigap and Medicare Advantage, along with a look at how healthcare costs might vary based on the state a retiree lives in and when the person retires. View the full report here.

SEATTLE, Sept. 22, 2022 /PRNewswire/ — Milliman, Inc., a premier global consulting and actuarial firm, today released its 2022 Retiree Health Cost Index which projects the total premiums and out of pocket expenses a healthy 65-year-old can expect to spend on medical and prescription drug costs in retirement. The report also looks at cost variations across sex, geography, and the two most common coverage options for Medicare-eligible retirees.

In 2022, they project a healthy 65-year-old man with a Medicare Advantage plus Part D (MAPD) plan will spend $137,000 in healthcare expenses in his remaining lifetime. The same retiree covered by Original Medicare with Medigap (Plan G) and Part D (standard benefit) is projected to spend $264,000 on healthcare expenses in his remaining lifetime.

For a woman retiring at age 65, they project she will spend $158,000 on healthcare expenses over the course of her lifetime if covered by an MAPD plan. That cost increases to $300,000 with Original Medicare plus Medigap (Plan G) and Part D (standard benefit) coverage. Higher healthcare costs for women are largely the result of longer life expectancy when compared to men.

“There are a wide variety of reasons that healthcare expenses for retirees can differ – geography, coverage type, and age at retirement are just a few of the variables,” says Robert Schmidt, a principal at Milliman and co-author of the Retiree Health Cost Index. “Healthcare costs are an important, and sometimes overlooked, component of overall retirement planning, and it’s important for retirees to understand the options available to them and make the best decisions for both their health and finances.”

Financial Impact of Retiring Earlier or Later Than Age 65

Financial impact of retiring earlier

Most people cannot apply for Medicare until age 65, and if you retire before then your healthcare costs will generally be much higher. For example, if you retire five years earlier, at age 60, you can expect to pay approximately the following over your remaining lifetime:

  • 53% more for healthcare expenses than if you wait until age 65 and enroll in Original Medicare plus Medigap (Plan G) plus Part D (standard benefit).
  • 77% more for healthcare expenses than if you wait until age 65 and enroll in an MAPD plan.

Note that the healthcare costs prior to age 65 are the same in each scenario.

There are a wide variety of reasons that healthcare expenses for retirees can differ – geography, coverage type, and age at retirement are just a few of the variables...

Financial impact of retiring later

Conversely, delaying retirement allows retirees to boost retirement savings and continue earning income and employer-sponsored benefits, including healthcare. This can also mean significant healthcare cost savings. For example, if you retire five years after turning age 65 (at age 70), you can expect to pay approximately the following over your remaining lifetime:

  • 28% less for healthcare expenses than if you retired at age 65 and are enrolled in Original Medicare plus Medigap (Plan G) plus Part D (standard benefit).
  • 29% less for healthcare expenses than if you retired at age 65 and enrolled in an MAPD plan.

Taking Your Health Into Consideration

Out-of-pocket costs for healthcare are an important part of retirement planning, and how much you will spend depends on a variety of health factors:

1.) Your current health status including heart problems, arthritis, and other chronic or recurring ailments.

2.) Risk factors that could affect your future health status, such as tobacco use or high blood pressure.

3.) The level of financial risk that you are willing to take on (or withstand) by trading off lower premiums for higher deductibles and out-of-pocket costs.

Retirees with above average health

Healthier retirees (representing the average of the lowest-cost third of Medicare beneficiaries) can expect to spend approximately the following over their remaining lifetime:

  • 12% less on healthcare costs for Original Medicare plus Medigap (Plan G) plus Part D (standard benefit)
  • 28% less on healthcare costs for an MAPD plan

Retirees with below average health

Retirees with below average health (representing the average of the highest-cost third of Medicare beneficiaries) can expect to spend approximately the following over their remaining lifetime:

  • 18% more on healthcare costs for Original Medicare plus Medigap (Plan G) plus Part D (standard benefit)
  • 45% more on healthcare costs for an MAPD plan

Even if you don’t have any current health issues, it is important to consider that your health status can change rapidly. There is great potential for considerable healthcare spending in the later years of life, especially if you have a chronic condition or an acute episode such as a heart attack or stroke. If you have health issues or are at risk for developing health issues, consider addressing this potential risk by budgeting for a below average health status in retirement.

Life span considerations

While you can’t control your life span, you should plan for it. A range of plus or minus five years in life span can increase or lower retirement healthcare costs significantly. Under either plan option:

  • Living five years longer increases the amount you spend by approximately 40%
  • Living five years less reduces the amount you spend by approximately 32%