To have a 90% chance of meeting healthcare expenses, a 65-year-old man enrolled in Medigap Plan G with an average premium would need to save $184,000 for healthcare in retirement, and a woman would need $217,000, according to the Employee Benefit Research Institute. For a couple, that comes to $351,000, EBRI says in a recently released report.
Estimates are a great starting place, but it’d be a big mistake to hold $351,000 as the number for every 65-year-old retiring couple.
The problem with an average estimate for healthcare costs in retirement is exactly that: It’s an average estimate.
Everyone has different needs, and several factors impact an individual’s healthcare costs. For example, average estimates don’t take the following into account:
- Specific healthcare needs, such as medications or preferred doctors.
- Location (Healthcare costs vary based on where you live.)
- Personal preferences (like carriers) and risk tolerance.
EBRI researchers assumed the retiree enrolled in a Medigap Plan G plan with average premiums. When it comes to Medicare coverage, your clients can choose between Original Medicare (with many Medigap options outside of Plan G) and Medicare Advantage. Within both configurations, the number of coverage options can be overwhelming for retirees.
The Real World
I’m going to share four real-life examples of 65-year-olds’ estimated healthcare costs based on the information they provided via a custom Caribou HealthPlanning Analysis. (Names have been changed to protect confidentiality.) Once their specific healthcare needs, preferences and financial goals are considered, their personalized cost estimates differ from the national average.
For the sake of comparison, I’ve assumed EBRI followed the national average life expectancy of 84.3 years for men and 86.9 for women in the report. That means if you take the man’s $184,000 estimate and the woman’s $217,000 estimate, the typical 65-year-old man will need $9,533 each year to cover his healthcare costs in retirement, and the typical 65-year-old woman will need $9,908.
With the average annual amounts established, let’s move on to the case studies.
Meet Patricia
Patricia is in good health, fills her prescriptions at CVS down the street, has three doctors who are important to her care and prefers a low out-of-pocket maximum. Based on her preferences, financial goals and location, her optimal health plan option is Original Medicare rather than Medicare Advantage. Looking at plans in her county, her estimated annual healthcare costs in retirement, according to our HealthPlanning Analysis, are $3,348. While this amount will likely fluctuate (which is why we recommend annual reviews) this number is below the estimates derived from EBRI’s report.
The difference between her annual costs and EBRI’s estimate for women is $6,560 per year — or $143,664 total — over the course of Patricia’s retirement. That’s money that could be allocated elsewhere, like gifting to grandchildren or taking multiple vacations over her retirement.
Meet Tony
Tony is living with health conditions, visits several doctors and wants to continue seeing them, takes prescription medications and wants a health plan with a low deductible. Based on these preferences, financial goals and location, his best option is Original Medicare. Looking at plans in his county, his estimated annual healthcare costs in retirement are $4,831, according to our analysis.
Again, this amount will likely vary each year, but it is below the average annual estimate we derived from EBRI’s total estimate. The difference between his costs and EBRI’s estimate is $4,702 per year — or $90,748 total — over the course of Tony’s retirement.
Additional Reading: Medicare’s Push to Improve Chronic Care Attracts Businesses But Not Many Doctors
We’ve seen two examples where the retiree opted for Original Medicare, but what about Medicare Advantage? Let’s look at two examples of what retirees on a Medicare Advantage plan might spend in retirement.
Meet Jerome
Jerome has health conditions, takes a few prescription medications, and doesn’t mind spending a moderate amount on premiums and out-of-pocket costs if it means all his current doctors, prescriptions and pharmacies are in-network. Based on these preferences, financial goals and location, his best option is a Medicare Advantage plan carried by Aetna. Under this plan, his estimated annual healthcare costs in retirement are $12,070, according to our analysis.
For Jerome, EBRI’s estimate is lower than his personalized estimate. The difference between his costs and EBRI’s estimate is $2,537 per year — or $48,964 total — over the course of Jerome’s retirement.
Following a general estimate would cause Jerome and his advisor a lot of stress as they realize that Jerome doesn’t have nearly enough saved for healthcare costs. This becomes an even bigger problem once Jerome moves to a fixed income.
Meet Yvonne
Yvonne is relatively healthy and takes only one medication. She also prefers to have a lower total financial risk and wants a plan with a high star rating. Based on these preferences, her financial goals and her location, her optimal option is a Medicare Advantage plan carried by Humana. Under this plan, her estimated annual healthcare costs in retirement are $5,592, according to our HealthPlanning Analysis.
EBRI’s estimate is higher than Yvonne’s personalized estimate. The difference between her costs and EBRI’s estimate is $4,316 per year — or $94,520 total — over the course of Yvonne’s retirement. As with Patricia, this money could be allocated elsewhere. If Yvonne followed the higher estimate by EBRI, she might forego some of her retirement goals, like moving to her dream home or taking a well-deserved vacation, to afford her estimated healthcare costs in retirement.
For Yvonne and countless other Americans, using a general estimate could create an inaccurate retirement plan. This is just one of many reasons why personalized healthcare planning is crucial not only for a more accurate financial plan but also to ensure retirees have what they need for a healthy, fulfilling retirement.
Final Thoughts
The takeaway here is not that general estimates are “wrong.” EBRI acknowledges in its report the limitations of the estimates. They can be a good starting place, but ultimately, healthcare costs vary significantly from person to person — even on the same health plan. Factors such as health needs, preferences, goals and location must be considered when planning for healthcare costs in retirement if you and your clients want to accurately and confidently plan for their retirement.
To plan for healthcare costs and ensure clients’ financial plans are as comprehensive as possible, personalized healthcare planning is a must.
Christine Simone is the CEO and co-founder of Caribou, a healthcare planning software solution for the finance industry. She has worked with key stakeholders in the healthcare industry, from payers to providers to Veterans Affairs. Although years away from her own retirement, Christine is obsessed with helping current and future reitirees plan for and optimize their healthcare costs. She can be reached at christine@getcaribou.com.
