How to factor in health care costs

Created date

May 27th, 2015
jar of money
jar of money

You probably have a vague sense that medical expenses will account for a significant portion of your budget in retirement. But, if you’re like many Americans, you may not have a good sense of exactly how much you are likely to spend on health care in later life. 

Only one in six pre-retirees has ever attempted to figure out how much money they will need for health care and long-term care in retirement, according to a study by Merrill Lynch ( and Age Wave (

The study also revealed a big gap between the health care services people believe they will need to access and the reality: “While only 37% of people over 50 believe they may need long-term care during their lifetime, the reality is that 70% will, in fact, need long-term care at some point during their later years.”

Set expectations

So, what is that magic number—the amount you need to save to ensure you’ll be able to cover your out-of-pocket medical expenses? Of course, the figure varies depending on factors like age at retirement and your overall health. But Art Koff, founder of senior resources website Retired Brains (, compiled data from several sources, including Prudential and Fidelity, and he determined that a typical married couple retiring at age 65 can expect to spend between $245,000 and $291,000 on out-of-pocket medical expenses over the remainder of their lifetime. The same surveys revealed that some couples could spend in excess of $500,000 and possibly up to $1 million depending on individual health care needs. 

“Health care costs are underestimated because most people planning their retirement aren’t aware of the length of time they are likely to live as well as the full yearly costs of health care,” Koff says. “Research from the Employee Benefit Research Institute (ebri
) reveals that 25% of 65-year-old males (the 75th percentile) are expected to live to age 89, and 10% (the 90th percentile) are expected to live to age 94. Once a couple reaches the age of 65, it is likely that one member will live to be at least 90.”

What’s not covered

In order to get a realistic estimate of potential health care costs, Michigan wealth advisor Margie Shard ( says it’s important to account for all of the expenses not covered by Medicare that often add up quickly. For example, she says her clients spend an average of $1,500 annually on dental care even if they have a supplemental Medicare policy with some dental coverage.

Co-pays and coinsurance premiums are another big out-of-pocket expense. Shard advises clients to select supplemental policies with co-pays and premiums they can afford. And while the Affordable Care Act is helping to close the so-called “doughnut hole” (the coverage gap for out-of-pocket drug costs), Shard says many retirees can still expect to spend a pretty penny on medications, especially people who are on expensive daily drug regimens.

Shard advises all retirees to sit down with a qualified health insurance and Medicare expert who will review your medical history and help you select a plan that is affordable—not just in premiums, but also in what services it covers. She also recommends taking advantage of a health savings account because distributions for qualified medical expenses are tax-free.