Retirement Expenses: Medical Costs – The Road to Retirement
When it comes to planning for retirement, there are a lot of variables that seem impossible to predict, especially when it comes to expenses. Many people play a “predict the worst” game with their retirement savings and over assume how much medical care will cost, which is safe, but can lead to you not being able to live the lifestyle you want. Many others forget medical costs entirely and rely on their insurance to sort this out, hoping that they won’t need any expensive medical treatment.
Both of these strategies have their flaws, and it shouldn’t surprise you to know that the correct way to plan is somewhere in the middle.
Before we dive too far into it, this article is going to focus on medical expenses that exclude long-term care. Things like nursing homes, hospice, and home nurses are needed by a lot of retirees, but their costs and the way to plan for them are very different—which is why we wrote a separate article on that.
Aim for the Average
Health care is the third largest expense for most retirees (housing and transportation are first and second in case you’re wondering). The reason it is so much lower is because a lot of people have continued health insurance support from their employer. This isn’t true for everyone, less and less retired employees have access to medical insurance through their employer. Luckily, SDPEBA members are able to sign up for medical insurance through us.
But, even with Medicare plus whichever health care option you sign up for, most retirees end up using around 15% of their savings on out-of-pocket medical costs (such as copays, premiums, and prescriptions) and that number is only expected to rise with life expectancy.
As of 2021, the average amount retirees end up paying for care over their lifetime is between $300,000 and $380,000. The number depends largely on how long you end up living, these numbers are based on averages for people between the ages of 75-85.
Dealing with Inflation and a Population Surge
As we discussed in our other articles, the cost of health care is outpacing inflation dramatically. As people live longer, and as more people head into retirement, we’re expecting the $300,000 average to jump to $455,000 in about 25 years. That means people who are 40 now (we’re writing this in 2021) are expected to pay almost $155,000 more in retirement.
Getting a Discount
Two of the most effective ways to lower the cost of medical care are: making smart health choices and choosing the right insurance.
You can’t rewind the clock, but no matter your age, you can start taking better care of yourself. Making sure you’re getting 30-60 minutes of exercise every day can actually save you a lot of money off your annual medical costs. Experts suggest retirees who habitually exercised while younger saved around 15% on the lifetime medical costs, which is saying something because they also tended to live 2-4 years longer!
As for choosing the right insurance, well. That’s not too difficult. We already wrote a guide to Medicare so you can see what you need to know ahead of time. You can also learn more about our Retiree Sharp Plans by clicking here. You can also start your retirement with COBRA and CalCOBRA, which will save you even more money in the long run. We also wrote a guide that explains how your SDPEBA benefits translate directly into retirement here (we go over COBRA in this too!).