Understanding the True Cost of Health Care in Retirement

Abstract

After years of working hard and diligently saving to prepare for retirement, many individuals expect they’ll finally be able to slow down, pursue hobbies, and enjoy the next phase of their lives. However, the truth facing retirees today is that numerous financial risks and uncertainties threaten their ability to spend their hard-earned money and maintain the quality of life they desire. Perhaps the greatest worry for those in, or near, retirement is whether they will be able to afford rising healthcare costs, particularly unplanned out-of-pocket expenses. Retirees’ concerns around health care are not without merit, yet a closer look reveals a different picture. Our research concludes that healthcare expenses for many retirees are a small percentage of total spending and are far less variable than most people think, making them easier to plan for properly than conventional wisdom suggests. Two healthcare-related risks increase spending variability in retirement dramatically: long-term care events and longevity. An appropriate strategy for managing healthcare expenses in retirement is to plan for known or diversifiable risks and insure the unknown or undiversifiable risks. This study has three primary goals. First, to assess and quantify the variability of out-of-pocket healthcare costs to determine whether retiree concerns around funding these expenses are warranted. Second, to identify what factors drive variability in spending and quantify their potential financial impact. Third, to identify solutions financial professionals can utilize with clients to reduce spending variability and achieve better outcomes in retirement.