Special Planning Needed for Health Costs in Retirement

Individuals should consider the expense and usage of nonrecurring health care services, which increases with age, when planning for retirement.

The cost for the more predictable health care expenses—doctor visits, dentist visits and usage of prescription drugs—remains stable throughout retirement, according to an analysis from the Employee Benefit Research Institute (EBRI). 

EBRI data show the average annual expenditure for these recurring health care expenses among the Medicare-eligible population is $1,885. A person with a life expectancy of 90 would require $40,798 at age 65 to fund his recurring health care expenses, assuming a 2% rate of inflation and 3% rate of return. This required amount does not account for recurring expenses such as insurance premiums or over-the-counter medications.

However, the usage and expense of nonrecurring health care services, such as overnight hospital stays or outpatient surgeries, increases with age. Nursing home stays in particular can be very expensive, EBRI notes, with average spending in this category for people ages 85 and above during a two-year period being $24,185.

“Health care is one of the key components of retirement expenses and is the only part of household expenditures that increase with age,” says Sudipto Banerjee, EBRI research associate and author of the report. “While some of these costs are more predictable, others are uncertain, and for many people these expenses spike toward the end of life when resources are slim. To successfully manage your resources in retirement, a good plan may include separate preparations for each.”

Usage of recurring health care services typically goes up with income, while usage of nonrecurring health care services goes down with income (except outpatient surgery and special facilities use). The top income quartile spends significantly more on both nursing home and home health care expenses than the others, with the average expenses for nursing home and home health care at $16,595 and $1,642, respectively, for the third income quartile, and $28,133 and $4,695, respectively, for the top income quartile. These findings are potentially a result of Medicaid coverage for the lower-income, lower-asset groups, according to EBRI.

EBRI also finds nursing home stays, home health care usage and overnight hospital stays are much higher in the period preceding death. The survey reveals a majority of people in every age group above age 65 received in-home health care from a medically trained person before death. For those ages 85 and older, 62.3% had overnight nursing home stays before death, and 51.6% were living in a nursing home prior to death. Statistics show women older than 85 use nursing homes at a much higher rate than men.

The “Utilization Patterns and Out-of-Pocket Expenses for Different Health Care Services Among American Retirees” report includes data from the Health and Retirement Study (HRS) of a nationally representative sample including U.S. households with individuals older than age 50. The full report is published in the February EBRI Issue Brief No. 411, online at www.ebri.org