Predicting healthcare costs is a lot like trying to predict the winner of March Madness or the Super Bowl at the beginning of the season. While you can make some educated guesses, few are successful in guessing the outcome precisely. The difference is that wrong assumptions regarding healthcare costs can spell disaster for your retirement income.
In this post, we will take a look at how to estimate your healthcare costs in retirement, how you can save for these costs, and other considerations.
How Much Will Healthcare Cost?
Fidelity estimates that retiree healthcare spending rose $15,000 year over year to an average of $275,000 per couple in 2017. This does not include long-term care expenses and assumes that you and your spouse retire at age 65 with Medicare coverage. Of course, these prices are only likely to rise over the coming years, so you must also factor in the rate at which healthcare costs are projected to increase each year, which is known as healthcare inflation.
The good news is that the healthcare inflation rate fell from 11.9 percent in 2007 to a low of six percent in 2017, according to PwC’s most recent Medical Cost Trend projections. The bad news is that this “new normal” of six to seven percent is still unsustainable since it outpaces the general inflation rate, which currently sits just above two percent. Cost-sharing with consumers has helped slow utilization and counteract higher prices in the past, but further cost-sharing with consumers will be difficult, and that could lead to faster healthcare inflation ahead.
When you’re thinking about healthcare costs, it’s important to factor in long-term care expenses (that aren’t covered by Medicare). According to Genworth, these costs range from $1,517 per month for adult day healthcare to upwards of $8,000 per month for a private room in a nursing home. The Department of Health and Human Services reckons that most people use about three years of long-term care, which is about $54,612 to $288,000 in today’s dollars.
Finally, you must factor in monetary inflation as you would with any other retirement projections. Inflation may have been essentially non-existent since the 2008 financial crisis, but there are signs that it’s starting to pick up again in 2017. The Federal Reserve’s two percent target rate is generally a good estimate to use. For example, if you want to save $5,000 in today’s dollars in 2050, you should target a future balance of $9,423 when planning.