Americans Way Off on Estimating Retirement Health Costs

Americans with a written financial plan from an adviser are more likely to include health-care costs as part of their retirement planning, according to a new survey.

The July survey of the First Command Financial Behaviors Index found that Americans are expressing concern about paying for medical costs during retirement—and dramatically underestimating the financial burden they’ll be expected to bear.

The survey found that 72% of Americans are at least somewhat concerned about health-care costs in retirement, with those closest to retirement expressing the most concern, according to a press release. Respondents predicted that they will need about $33,000 above traditional retirement savings to cover health-care costs during retirement; that is only a fraction of the $166,000 in out-of-pocket expenses estimated for someone retiring today and living to age 100.
Despite their concerns, less than one-third of respondents include health-care costs as part of their retirement planning. Among those, half save less than $100, 36% save between $100 and $300, and 14% save more than $300. Among non-retired Americans with a written financial plan from a financial adviser, 41%, nearly double the percentage of those without a financial plan, include health care costs as part of their retirement planning.

Current premiums for Medicare Part B, the average for Medicare Part D, and the maximum out-of-pocket drug costs (before Medicare Part D begins paying 95% of drug costs) total $5,842 per year, according to the release. Assuming a 5% return on savings and an average premium increase of 3.7% (the Part B increase rate through 2016), an individual retiring at age 65 today and living to age 100 would need an estimated $166,000 to meet those expenses. For a couple, the figure doubles to $332,000.

The latest annual estimate from Fidelity Investments is that an average couple retiring in 2009 would need $240,000 set aside by age 65 in order to pay for health-care expenses in retirement (see “IMHO: The Mean-ing of Average”).

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