Many planning for retirement do not have a clear understanding of what their retiree healthcare will cost but—based on new estimates—they might want to take a closer look.
As you might have guessed, the total amount a 65-year-old retiring in 2022 can expect to spend on health care and medical expenses in retirement has gone up again. According to estimates by Milliman, a healthy 65-year-old will spend on average between $137,000 and $300,000.
The firm’s 2022 Retiree Health Cost Index 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.
Medicare Cost Variations
Broken down further, for a healthy 65-year-old man with a Medicare Advantage plus Part D (MAPD) plan, Milliman projects that, for 2022, that person 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. The retiree is assumed to have a life span of 88 years.
Consequently, for the MAPD option, the male would need $92,000 in savings (net of taxes) at age 65 to pay the remaining lifetime “total spend,” assuming an investment return of 3% per year. For the Original Medicare plus Plan G and D options, the person would need $177,000.
For a woman retiring at age 65, the firm projects 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 Plan G and Part D coverage. Higher healthcare costs for women are largely the result of longer life expectancy when compared to men. In this case, women retirees are assumed to have a life span of 90 years.
Similarly, the amount of savings the woman would need under the MAPD option would be $103,000 to pay the remaining lifetime “total spend” (also assuming an investment return of 3% per year).
What’s more, under the Original Medicare plus Plan G and D options, the woman would need $194,000. If the female lives the same number of years as the male retiree (to age 88), she is projected to spend approximately $260,000 ($4,000 less than the male). In that case, she would need $175,000 in savings in 2022 to cover this future spend in today’s dollars, the report notes.
Retiring Earlier or Later
Not surprisingly, the financial impact of retiring earlier or later than age 65 can also have significant consequences.
Because most people cannot apply for Medicare until age 65, if a person retires before then, their healthcare costs will generally be much higher. Milliman notes, for example, that if a person retires five years earlier, at age 60, they can expect to pay approximately the following over their remaining lifetime:
- 53% more for healthcare expenses than if they waited until age 65 and enroll in Original Medicare plus Medigap (Plan G) plus Part D (standard benefit).
- 77% more for healthcare expenses than if they waited until age 65 and enroll in an MAPD plan.
Conversely, delaying retirement allows retirees to boost retirement savings and continue earning income and employer-sponsored benefits, including healthcare, which can translate into significant healthcare cost savings.
For example, if the person retires five years after turning age 65 (at age 70), they can expect to pay approximately the following over their remaining lifetime:
- 28% less for healthcare expenses than if they 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 they retired at age 65 and enrolled in an MAPD plan.
“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,” notes 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,” he adds.
