The real cost of health care in retirement

It’s never easy to talk about your health and what it might look like in the future, but with health care costs rising, it’s an essential conversation to have with family and the professionals you work with.

According to a new report from rbc wealth management, the projected lifetime cost of care for a healthy 65-year-old is $404,253, and that doesn’t take into account long-term care costs, which could amount to $100,000 a year.

Most Americans know that health care is expensive, and 80 percent of those surveyed in a recent survey told RBC they worry about how they will pay those costs in retirement. however, many are doing nothing to calm their own fears. only 56% of respondents said they have factored the cost of care into their financial plans, while half of those who have considered it feel they are underestimating the price.

in fact, they are. When RBC asked people how much they think they’ll spend on health care at age 65, they said around $2,700 a year, on average. in fact, experts estimate that at age 65, annual health care spending for a healthy couple is about $5,700 per person ($11,400 for a married couple). “These are out-of-pocket costs,” says Griffin Geisler, a Minneapolis-based estate planning consultant with RBC Heritage Management.

“Medicare only covers a certain amount of expenses, which means people have to fill that gap. the costs start to add up quickly.”

increasing health care costs

one reason for higher costs is inflation: health care expenses are rising faster than other costs, which is why rbc uses a five percent inflation number for clients who are close to or in retirement, but it also has to do with people living longer and the need for more advanced treatments.

“This increase in costs is largely due to increased demand driven by longevity and advances in treatment and technology,” the report says. “For example, so-called maintenance procedures like joint replacement and cataract surgery are becoming more common, but they carry significant price tags as they impact a larger number of baby boomers.”

The report notes that premiums, deductibles, copays, and out-of-pocket costs are also on the rise. Even when Medicare coverage is factored in, at age 75, health care expenses will represent 15 percent of your overall expenses, which is double what you would have spent during your working life.

Clearly, health care is expensive, so why aren’t more people planning for those costs?

“Part of it is denial,” Geisler says. “Healthy people don’t want to think about what life will be like when they’re older and not so healthy.”

start saving early

Because costs only go up from here, people should start factoring health care expenses into their financial plans, just like they would a house or an annual vacation, says angie o’leary, director of RBC Heritage Management-U.S. Estate Planning Medical goals need to be realistic, she says, and work with that five percent inflation rate in any calculation.

Once you have a realistic view of how much you could spend on health care each year, the next hurdle is figuring out how to pay for it. that’s where your wealth advisor can help.

As with any kind of savings, the more money you can save in your younger years, the better off you’ll be. this is especially true for health care, as costs rise exponentially with age. According to the report, people between the ages of 65 and 74 spend about $13,000 a year on health care. that jumps to $24,000 for ages 75-84 and then rises to $39,000 for those 85 and older. “For younger savers, time really is on their side,” say the report’s authors.

health care savings tools

However, as the data shows, it’s one thing to know that health care is expensive and another to plan for those costs. Fortunately, there are several ways to save, one of the most important being Health Savings Accounts (HSAs). These are investment accounts, typically offered by employers, that allow people to set aside pre-tax dollars for health care expenses. employers will also sometimes match contributions.

HSas are great savings vehicles because they come with a triple tax benefit: contributions are made before taxes, investments can grow tax-free, and withdrawals for qualified health care expenses are also tax-free.

You can also invest those dollars in a variety of vehicles, just as you would a 401(k) or other retirement savings account.

“These are great,” says Geisler. “The money can be carried over from one year to the next and you can accumulate a significant amount.”

Annual contribution limits are $3,450 a year for individuals and $6,900 for families, but since it’s not taxable, any money put into the fund should add up quickly. For example, if you invest $100 in the account every month for 20 years and assume a 6 percent rate of return, those dollars will grow to $46,000 by 2038. You can withdraw money from an HSA at any time.

another option is to invest in a roth 401(k). Contributions are taxable when the money is initially deposited, but you can withdraw your money tax-free when you retire. Start saving early and the tax impact will be low, while your dollars can compound tax-free for decades.

“People should maximize any type of tax-efficient savings vehicle as much as possible,” Geisler says.

There are other options, like purchasing disability insurance and taking advantage of company-provided benefits packages, but it’s also important to live a healthy lifestyle, Geisler says. take care of yourself now and your health care costs may be lower later.

it’s never too late to start saving

Of course, saving for health care, especially if you haven’t saved money yet, will require you to cut back elsewhere. Geisler recommends that people classify their spending into different categories, such as needs, wants, and wants.

Health care should come first and should be as much of a priority as basic living expenses and retirement savings, he says. You may need to give up some of those wishes and desires, like that extra trip you take every year, but consider the alternative of not being able to pay the hospital bill.

The conversation about health care can be difficult, but start talking now before it’s too late.

“You may think having $1 million in retirement will last a long time, but understand that you’ll have to spend some of it on health care,” O’leary says. “If you can get in front of this before you retire, then you can catch up and adjust where you need to.”

read more of our insights report on rbc’s wealth taking control of healthcare in retirement.