How to Calculate Health Care Expenses in Retirement
by Victoria Finlay
Health care is a major concern for people as they get older. The unanswered question of whether or not you will be able to afford your health care expenses can be unnerving. In the blink of an eye your life changes from working one to day to no longer working the next. This transition can be overwhelming and scary for many retirees.
One reason why retirees become anxious about health care expenses is because of the way they view it. Retirees should look at planning for health care expenses as a complex multi-step process that includes annual payments, as opposed to one large lump-sum. Fidelity has estimated that a healthy 65 year old couple retiring in 2018 will need $280,000 to cover their health care costs in retirement. Initially looking at this number people become overwhelmed and fixated on the large cost. By breaking down that number into monthly and annual amounts it allows retirees to see the costs that they will be facing on a regular basis rather than as a one-time expense. Below is the breakdown of how the estimated $280,000 worth of health care expenses are split up.
The best way to prepare for these future expenses is to look at 4 major areas that pertain to the costs of health care expenses in retirement.
Health Care Factors
A common misconception of retirees’ health care expenses is that it is a wealth problem. While part of the problem has to do with wealth, the other part that is downplayed is the health aspect. One factor about health status to consider is age. As you get older your health deteriorates and your health care expenses will most likely be more expensive than they were pre-retirement. This is an adjustment people need to factor in along with the multiple other layers associated with health status and risk.
Another factor to consider is how long you will be taking on these expenses. Statistics have shown that women live longer than men do, this is something important that women should account for. Other aspects that may affect the cost include retirement age, Medicare coverage, and geography.
By living a healthy lifestyle that includes a clean diet, working out, adequate sleep, and being a non-smoker you can help lower what your future health care costs may be. There are other unexpected risks in life that may still come along regardless of the lifestyle you live, but maintaining a healthy lifestyle is the best way to control what your health care expenses in retirement may be.
Wage Replacement Ratio
According to The Balance, a wage replacement ratio refers to the percentage of pre-retirement income a retiree needs during retirement. An example is when a couple assumes that they need an 80% wage replacement ratio in order to live their desired lifestyle in retirement. If this couple’s pre-retirement income was $100,000, the couple will only need $80,000 annually in retirement.
The readjustment of how much a retiree plans to spend annually can be either an increase or decrease in his or her spending habits depending on the person. It is important to consider what health care expenses may be during retirement, that way the cost of it is incorporated into the appropriate wage replacement ratio. You want to ensure that regardless of how you plan to spend your money in retirement, you are prepared for future health care expenses and include them in your retirement planning.
Health care costs in retirement have been and are on the rise. As you age, you consume more health care. This is not only because you are getting older, but also because over time these expenses have risen at a faster rate than inflation. Once you have reached your 60s you should definitely begin to discuss health care costs in retirement. This will allow you to estimate projected health care costs along with gauging your health status more accurately.
While it is never too early to spark the the health care discussion pre-retirement, it is also important to keep in mind that the cost and other laws or factors about health care may be drastically different during your 30s, 40s, or 50s than the age at which you decide to retire. It is valuable to always be prepared and remain informed on what is happening in the health care world.
When people are planning for the future, especially for health care expenses, they tend to focus on the worst case scenario. People fear that they will run out of money and because of this people tend to overestimate their financial needs. An example of this is the cost of long-term care. Long-term care includes nursing homes, assisted living facilities, and home health aide services which can all be very pricey.
There is a probability that an individual will need some form of long-term care. This probability is real, but it is low. To take this into account it should be noted as a separate planning aspect aside from health care expenses in retirement. Since long-term care is expensive, you want to focus on it independently from other expenses in retirement.