This just in, straight from the good-news department: You may spend far less on health care in retirement than you think.
According to a study by the Employee Benefits Research Institute (EBRI) that tracked actual spending by actual people for decades. The author, Sudipto Banerjee, found that outside of Medicare premiums, the majority of which are paid directly from Social Security, the average retiree who lived to age 95 spent roughly $27,000 out of pocket.
This flies in the face of widely quoted studies—one by other researchers at EBRI—that project today’s seniors need as much as $368,000 per couple at retirement solely for health care expenses. Fidelity Investments puts the number at $280,000 a couple in 2018.
“Understanding what accounts for the differences—and how they apply to your financial situation—is the key to sound health care expense planning for your retirement. ”
Here are some important caveats. Banerjee’s study started following seniors at age 70, so it’s missing the first five years of Medicare. Second, unlike the other studies, it does not include Medicare premiums that are paid directly from Social Security checks. Third, by focusing on actual individuals in our incredibly diverse country, it finds a wide dispersion in spending, largely driven by longevity and long-term care expenses. One in ten respondents started Medicaid eligible when the study started in 1993 and one in three were enrolled by the end of their lives. This safety-net system limits out-of-pocket spending.
Unsurprisingly, big health care spending occurred among the oldest who entered nursing homes, with women more affected then men. But even here the financial damage was less than may be expected. The median person spent nothing on long term care expenses, as fewer than one in two ever need it. Of those who do need it, however, the tab of the top 10 percent of spenders was $96,000 per person.
Banerjee’ study took what I call an empirical approach—it went out into the world and studied what is actually happening. The studies concluding the huge numbers take a more academic—and arguably more comprehensive—approach. They accounted for all potential spending—including the costs of a comprehensive Medicare plan with the most expensive supplement—and calculate a net present value or lump sum needed at retirement to fund it. This is certainly accurate for some—and it’s likely to generate an attention-grabbing number.
Consider that the average Millennial American family—those born after 1981—spends $3,399 a year on groceries, according to the Bureau of Labor Statistics Survey of Consumer Finances. The average age is 27. Using similar discounting methodology, they need just under $93,928 today to pay for their food at home until retirement at 67. We wouldn’t be concerned about a food crisis, however, as we expect them to earn income to pay for it as they go and, if hard times come, food stamps and food pantries will fill the gaps.
This is an instructive way to approach health expenses in retirement. The only expenditures that matter, after all, are yours. General alarm does little good but actual planning that incorporates expected income and available assets will likely make it clear whether health spending will make your retirement ill or just be another necessary bill, such as property taxes, utilities and groceries.
Many high-earning seniors will spend far more unless they do some advanced financial planning to avoid the pricy Income-Related Monthly Adjustment Amount (IRMAA) that can nearly triple Medicare Part B premiums. Retirees with employer plans may spend far less. Those with Medicaid may spend almost nothing. Understanding and planning for the largest financial risk—needing the services of a nursing home—will go a long way to providing peace of mind and real financial protection.
The bottom line: Taking the time to apply your family’s situation to facts of the world—financial planning—is always the path to financial independence and clarity. My team stands ready to help.
Mike Lynch CFP is a financial planner with the Barnum Financial Group in Shelton CT. He can be reached at mlynch@barnumfg.com or (203) 513-6032.