What’s the True Cost of Senior Healthcare

Let’s take a closer look at senior healthcare costs in this most widely quoted study:

According to the Fidelity Retiree Health Care Cost Estimate, the average retired couple age 65 in 2018 may need approximately $280,000 saved (after tax)  to cover health care expenses in retirement.  This seems like a lot of money, and on the face of it, could not possibly be true.

Of course, those in poverty will qualify for Medicaid and avoid the costs in this post. But for those of modest means, this expense could spell bankruptcy in rertirement. 

The first thing I notice about this senior healthcare cost estimate is the quote per couple.  Based on US census data, nearly 20 million of the 47 million people over age 65 (43%), are single.  It seems to me that this study could have quoted a total senior healthcare cost of $140,000 per person, but I guess you can scare more people with the larger number.  I will use $140,000 per person in the remainder of this post.

Briefly mentioned by Fidelity are some solutions (products and services they sell):

“Consider increasing contributions to your tax-advantaged accounts, especially HSAs (if you have one), which enable tax-free spending on health care in retirement.”   Since all money management, mutual fund, and Wall Street investment managers earn fees from the money you deposit or invest with them, they will always tell you that a solution is to hand them more money.

Details of Senior HealthCare Costs – Do They Add Up?

How did Fidelity get this estimate of $140,000 per person?  Here are their basic assumptions and my comments on these assumptions.

Fidelity says, “The average 65+ retiree today should expect to pay around $5,000¹ a year on senior healthcare premiums and out-of-pocket expenses, and should carefully weigh all options.”

My wife turns 65 in a few months and I have been researching Medicare alternatives. Here are the total monthly out-of-pocket costs for three Medicare Advantage plans in my area.

You can see from the above, each Medicare Advantage plan estimates monthly costs for someone in good health.  The estimates range from $167 per month to $249 per month.  So for the most expensive Medicare Advantage plan, the yearly cost would be $2,988 (12 months x $249).   What if you’re not in good health? How would that affect your health?

The nifty medciare cost calculator allows me to show you the same graphic as above with cost adjusted for poor health.

The most expensive plan for an insured in poor health is now $295 per month or $3,540 annually.  The cost is higher for poor health, not because you pay more for the Medicare Advantage plan, but because you incur more costs for medication and co-pays.

Do You Also Pay for Medicare
Part B?

We need to add in another senior healthcare cost which is the Part B premium you pay directly to Medicare. Those Part B premiums are based on your income as shown in this table.

So that you will appreciate how much the government subsidizes your healthcare costs, look how much more high-income people pay for Part B.  They pay the true cost of the care and the difference between what they pay and you pay, is your government subsidy.  If you think you have paid for this through all those years or work and Social Security payments, you have not. The subsidy you get, where does it come from?  From the paychecks of your children and grandchildren. Thank  them.  

When we add the lowest possible Medicare part B premium of $134 per month ($1,608 annually), the total annual healthcare costs for a person in poor health are $5,148 annually ($3,540 calculated above plus $1,608 Medicare part B premium).  Therefore, $5,000 a year on health care premiums and out-of-pocket expenses estimated by Fidelity, appears accurate.

Cumulative Cost of Healthcare
After Age 65 

To calculate total cost of healthcare in retirement, we need an estimate of how long people live.  A man currently age 65 can expect to live, on average, until age 83 (18 years) and the average 65-year-old women will live until 85 (20 years), according to Social Security Administration data.

If healthcare costs are for 20 years at $5,000 per year, that is $100,000.  However, we all know that prices increase.  So if we assume that your healthcare costs increase 4% annually, here is what happens to the $5,000 annual healthcar cost:

Age 65	$5,000
Age 66	$5,200
Age 67	$5,408
Age 68	$5,624
Age 69	$5,849
Age 70	$6,083
Age 71	$6,327
Age 72	$6,580
Age 73	$6,843
Age 74	$7,117
Age 75	$7,401
Age 76	$7,697
Age 77	$8,005
Age 78	$8,325
Age 79	$8,658
Age 80	$9,005
Age 81	$9,365
Age 82	$9,740
Age 83	$10,129
Age 84	$10,534
Total	$148,890

Therefore, the total cost of $140,000 seems to be a realistic estimate for total healthcare costs in retirement.  

Use a Medicare Advantage Plan instead of traditional Medicare as Advantage plans are less expensive and often have greater benefits. Look at the 2nd table in this post where I show you costs for a person in poor health. The most expensive Medicare Advantage plan has estimated costs of $294 monthly vs $437 monthly for Traditional Medicare.

Best Ways to Reduce Senior Healthcare Costs

Don’t be unhealthy.  While this may sound silly at first, because you don’t think you control your health, you certainly do.  When I visit my HMO for healthcare, all I see is obese old people who can hardly walk. They caused their ill health.   If you eat poorly and are obese, then fix it.  Otherwise, your total healthcare costs will be greater. Your life will also be more miserable.

Medicare Advantage is Better and Will Save You Money

• Many Medicare Advantage plans also include Medicare Part D prescription drug coverage, so you get all your Medicare benefits in one convenient plan.
• You will not to buy Medigap insurance and have forms and bills as you will with Traditional Medicare
• In addition, many Medicare Advantage plans offer coverage for routine vision, dental, hearing services and will even pay for your gym membership so you can stay in shape.
• An emphasis on preventive care.
• Cost controls, including a cap on out-of-pocket costs for physician and hospital services (Medicare Part A and B benefits).