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The average 65-year-old couple will need a whopping $280,000 just to cover their health care costs in retirement, not including long-term care needs, according to a recent study by Fidelity.
Yet the reality is that health care costs aren’t borne as a lump sum on the day of retirement. And though individual health care costs may vary, they do so in rather predictable and plannable ways.
This perception gap presents yet another case where advisors can add value to the client relationship, not only by helping quell nerves, but by taking proactive steps to plan for potential health care costs — something that, as recent research suggest, we can do with a surprisingly high level of confidence.
Despite a steady drumbeat of media coverage that baby boomers aren’t saving enough for retirement, a recent PwC survey of boomers found that their biggest fear wasn’t actually running out of money before the end of retirement, but rather how they’re going to handle health care costs in retirement.
That fear isn’t necessarily surprising, given annual studies showing how substantial health care costs in retirement can be. A couple retiring today needs a whopping $273,000 to have a 90% chance of covering their health care costs, including Medicare, Medigap supplemental insurance coverage and out-of-pocket spending, whether it’s prescription drug co-pays or hospital coinsurance, according to a recent study by the Employee Benefits Research Institute. As previously mentioned, Fidelity similarly estimates the cost at $280,000.
Yet, while these dollar amounts may seem eye-popping — especially given a recent TransAmerica study’s findings that the average boomer has saved just $147,000 for retirement — it turns out that the typical savings requirements for retiree health care costs are really little more than a moderate ongoing dollar amount, albeit one spent repeatedly over a multi-decade period.
For a typical 65-year-old woman, the median annual health care expense in retirement is just $5,200 per year, according to a recent joint study between Vanguard and Mercer Health and Benefits. Of course, that expense may continue for 20-plus years, adding up to more than $100,000, plus ongoing health care inflation at a rate above the general level of inflation.
And for a married couple, a spouse may incur another $5,000-plus per year between $1,600 per...