Longevity Risk: Health Care Costs

By Philip Bachman

Our previous article on longevity risk showed that folks are living longer. It is exciting that many people have more time to do the things they enjoy and to be with family and friends. On the flip side, however, there is often a financial challenge to living longer in retirement. Among other things, this is amplified by expensive health care.

Planning for an average (or average plus a handful of years) life expectancy is not enough for healthy, active, and/or affluent people. This is especially true when we consider couples. There is a 50% probability that at least one of the two spouses of a married couple currently aged 65 will live to age 92, according to the Society of Actuaries (2012).

As our lifespans are increasing, unfortunately so are the health care costs that effect most retirees. An article in Investment News titled “The Longevity Paradox” (8/22/2016) states the point well: “[Health care expenses are] expensive for everyone, catastrophic for some, with no way of predicting which for whom.” This next part is an eye-opener. The article says that the total lifetime health care costs of a 55-year-old couple planning to retire at 65 is $463,849. And should we need it, the annual cost of a private room in a nursing home is $90,520.

Other sources estimating retirees’ medical costs are different yet still in the same expensive ballpark. An Investment News article dated 09/18/2016 has the title “Advisers face big challenges in helping clients prepare for health-care costs in retirement.” The article says “Fidelity Investments… estimates a 65-year-old couple retiring this year will need an average $260,000 to cover health care costs in retirement, and an additional $130,000 for long-term care insurance.”

What this means for retirement planning is that most people will need to begin an investing regimen if they have not already and save more during their working years. Even if putting away a little extra savings does not feel like much at the time, compound interest should help an account’s balance to grow. Those near or in retirement might need to adjust their expectations for health care costs. Regardless of how many years away one is from retirement, managing one’s own expectations about savings and future withdrawals can be difficult yet so important.

Having conversations with your family and/or financial advisor are likely to help. You could start by having discussions about your anticipated or current retirement lifestyle. Talking about lifestyle is a good starting point because it leads to discussing non-financial considerations as well as a corresponding budget, investment account withdrawals, and portfolio allocation. Conversations about long-term care planning or long-term care insurance are probably appropriate too.

There is a lot to planning for a long retirement, but it is not insurmountable. May we all be blessed with and ready for a full, healthy retirement.

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