How to plan ahead for retirement healthcare costs

Big, bigger, biggest.

Those words capture the retirement healthcare challenge. Healthcare will be one of the largest categories of cost for most retirees–and medical inflation is expected to run 2 to 3 times faster than general inflation.

Retirees can cope by tuning up their Medicare coverage, as we discussed in my last column. That can help control spending in retirement. But what about pre-retirees, who still have the opportunity to plan ahead for the healthcare cost challenge?

The numbers do sound daunting. A healthy 65-year-old couple retiring this year can expect to spend $322,000 (today’s dollars) on Medicare premiums and dental insurance, according to Healthview Services, a maker of healthcare cost projection software. Add deductibles, copays, hearing, vision, and dental cost sharing, and that figure rises to $404,000.

That certainly will make healthcare one of the largest areas of expense in retirement. And Healthview bases those figures, in part, on its projection that healthcare inflation will rise at a 5.47% annual rate for the foreseeable future. Public policy poses another risk: the federal government could implement reforms to Medicare–such as premium support–that would shift a greater share of the out-of-pocket burden to retirees.

With that background, let’s consider planning strategies that can help mitigate retirement healthcare costs: retirement timing, investing, and two tax-advantaged vehicles that can play a role (health savings accounts and Roth IRAs).

Delayed Retirement

At the risk of sounding like a broken record, my favorite approach to hedge healthcare costs is to work a bit longer and delay filing for Social Security.

A delayed filing can boost retirement income significantly. Social Security’s primary insurance amount rises by 8% for every 12 months of delay beyond your full retirement age (currently 66) until age 70–a powerful boost to income that can help fund rising healthcare costs. What’s more, the annual cost-of-living adjustment helps keep up with inflation, albeit at a slower pace than medical inflation.

And working longer also means more net years of employer-subsidized health insurance (and fewer years of Medicare premiums and out-of-pocket costs). It also provides an opportunity to sock away additional savings in your 401(k), perhaps utilizing catch-up contribution limits.


Ron Mastriovanni, Healthview’s CEO, looks at the healthcare cost challenge from the standpoint of income replacement ratios. Financial advisers use income replacement ratios to measure the income needed to maintain lifestyle in retirement; the standard rule of thumb is 75% to 80% of pre-retirement income. But that captures only part of a worker’s future healthcare spending needs, since employers typically pick up 75% of those costs.

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