How much does a retiree need to save for health care expenses?
Anticipated health care costs during retirement depend on Medicare choices, health status, residence and life span.
A hypothetical couple retiring in 2024 will need to save approximately $7,000 more than last year to cover health care expenses during the remainder of their life if they have Original Medicare plus Medigap and Part D coverage, and $8,000 less if they have Medicare Advantage plus Part D coverage, according to Milliman’s latest Retiree Health Cost Index.
A healthy 65-year-old man retiring this year can expect to spend up to $281,000 on health care expenses during the remainder of his life, requiring $188,000 in savings generating an investment return of 3% per year. A woman retiring this year can expect to spend $320,000, requiring savings of $207,000. Those estimates are based on a retiree with Original Medicare plus Medigap and Part D.
For those with Medicare Advantage plus Part D, a man would expect to pay $128,000 and require savings of $86,000 while a woman would expect to pay $147,000 and require savings of $96,000. Milliman cautioned that actual expenses may vary substantially from estimates and will depend on factors such as where the retiree lives and the benefit plan they choose.
One factor that can impact health care expenses is the timing of retirement. Those who opt to retire five years earlier can expect to pay 56% more for health care expenses than if they wait until age 65 to enroll in Original Medicare plus Medigap plus Part D and 89% more if they enroll in an MAPD plan.
Conversely, delaying retirement allows retirees to boost retirement savings and continue earning income and employer-sponsored benefits, including health care, potentially resulting in significant health care cost savings. Retiring at age 70 can reduce health care expenses by about 30% over the remainder of the retiree’s life.
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Healthier retirees can expect to spend between 11% and 24% less on health care costs, while those with below-average health can expect to spend between 9% and 39% more on health care costs in retirement, according to the index.
Lifespan plays a major role in the overall cost of health care in retirement, although it is a factor that is generally out of the retiree’s control. Living five years longer increases health care expenses by approximately 42%, while living five years less reduces health care expenses by approximately 32%.