Retirement spending, so the theory goes, tends to follow what some have called a U-shaped curve. It’s high in early years when younger retirees are spending on travel and other luxuries. In “mid-retirement” the spending curve slows as aging retirees tend to stay closer to home. Then spending rises once again as the oldest retirees find themselves paying for higher medical costs.
That model may not be accurate for everyone, but no matter what, there’s one reality all retirees will face: rising medical costs. Elsewhere on the Blog this week, we’ve included an article describing how Medicare Part B and Part D premiums are scheduled to increase steadily over the coming decade. This “companion article” adopts a wider perspective, and the message is clear. Health care costs across the board will consume an ever-higher percentage of the average retiree’s budget.
Is the $185,500 Figure a Reliable Spending Gauge?
This week, we came across an insightful article from CNBC in which reporter Lorie Konish gives us a glimpse into the latest data on projected medical spending in retirement.
“A 65-year-old who retires in 2026 may spend an average of $185,500 on health and medical expenses in retirement, according to a new estimate from Fidelity Investments,” she writes – “a price tag that the research shows is unexpectedly high for many retirees.”
We’ve seen headlines like this in the past, with a big, scary number representing projected medical costs in retirement. So, before we look more closely on the impact of that rising cost, we decided that a bit of perspective is in order. Assuming a 20-year retirement, that figure of $185,500 represents about $770 per month – not a lump sum payout but a slow drip of increasing expenditure. That figure will likely rise and fall depending on your overall health.
The total expenditure discussed in this article from Fidelity includes insurance premiums and co-pays. It also represents an average, reflecting the possibility of reduced payments based on lower income. In other words, while the “big, scary number” can indeed be scary, the reality carries a bit more nuance.
Healthcare Costs Keep Rising, and at a Faster Pace
Returning to Konish’s CNBC article, we discover that costs are not only increasing but rising at an accelerating clip.
She writes, “The figure [of $185,500] is up 7.5 percent from estimates for last year’s retirees amid rising healthcare costs, growing costs for chronic conditions and increasing utilization of medical services, according to the research.”
Fidelity executive Helen Lloyd-Williams told Konish that the rate of increase is also on the rise. “It definitely is a higher increase than we’ve had in the past few years,” Lloyd-Williams observed.
Konish adds, “The findings come as a record number of baby boomers are reaching traditional retirement age — a trend known as ‘peak 65’ — and may soon have to determine how to fund their medical care.”
Big Cost Increases Come from Multiple Sources
What accounts for this level of medical spending? That hefty cost comes from three primary sources, all related to Medicare.
“Fidelity’s estimate assumes retirees are enrolled in traditional Medicare — Part A hospital insurance and Part B medical insurance — as well as Part D prescription drug coverage,” Konish notes. Of the total estimated medical-cost outlay, 45 percent represents Medicare Part B and Part D premiums. (An accompanying Blog article this week reviews hefty projected increases in both over the coming decade.)
Fidelity further attributes nearly half of projected medical spending – 48 percent – to co-payments, coinsurance and deductibles, plus any other Medicare cost-sharing charges. The remaining 7 percent, says Konish, “comes from co-payments and expenses not covered by Medicare Part D that people pay out of pocket for branded, generic and specialty drugs.”
How does that translate into actual dollars? Based on the big number – $185,500 – that Fidelity projects, about $84,000 will be spent in the form of Medicare premiums. Nearly $90,000 will go to cover co-pays, deductibles, and related charges. Roughly $13,000 will cover Part D out-of-pocket costs. Remember, these are very rough approximations, offered only as illustrations.
A Rude Awakening for Those Who Think Medicare Covers Everything
As people approach retirement, CNBC notes, the majority are under a misperception that all their medical costs will be covered by Uncle Sam. They’re in for a shock.
“Most pre-retirees — 54 percent — incorrectly expect Medicare will cover all of their health expenses, according to Fidelity research,” Konish states. This closely matches the percentage of people who erroneously believe Medicare covers long-term care.
“This is education for people who may not have thought about how they might need to pay for healthcare in retirement, that their Medicare isn’t automatically going to cover everything, and that Medicare isn’t entirely free,” Fidelity’s Lloyd-Williams told CNBC.
Elephant in the Room: Projections Don’t Include Long-Term Care
In a remarkable understatement, Konish identifies a huge gap in the data on medical cost projections. “Notably,” she writes, “Fidelity’s estimate does not include long-term care.”
The potentially enormous costs of long-term care can knock even the best projections into a cocked hat. Konish quotes 2020 data from the Department of Health and Human Services, which says that today’s 65-year-old has a nearly 70 percent chance of needing some kind of long-term care services in the future. Apart from a limited stay in a rehab facility, none of these costs are covered by Medicare – and the costs are definitely overwhelming.
“Long-term care costs, including nursing home and home care, are rising faster than inflation and older adults’ incomes,” Konish notes, quoting a recent AARP report.
Long-Term Care Can Easily Double Other Medical Costs
It doesn’t take much imagination to see how the costs of long-term care can meet or exceed other projected medical costs. Konish offers a range of examples to prove the point.
“In 2024,” she writes, “the median annual private pay costs for six types of long-term services and supports were between $26,000 for five days a week of adult day care services and nearly $128,000 for a private room in a nursing home, according to data from financial services company Genworth and its wholly owned subsidiary, CareScout, focused on long-term care planning.”
Given that wide range of costs, it’s easy to imagine seniors spending as much on long-term care as on their other medical costs. But for retirees with average incomes, self-pay is virtually impossible. As Konish notes, “the median income in a household headed by someone age 65 or over was about $60,000 per year, according to the AARP, including Social Security benefits and other retirement income.”
Indeed, that median income is already being stretched to cover medical expenses. Konish writes that medical premiums and copays already consume about one-fifth of total income for middle-income retirees. That’s according to a 2022 research paper published by the Center for Retirement Research at Boston College.
Article Lacks Specifics on Covering Rising Healthcare Costs
Konish ends her CNBC article with the generalized observation that retirees need to plan for healthcare expenses when saving for retirement. But we felt her article didn’t go far enough in explaining how retirees might cover future costs, both for regular medical care and for long-term care.
One recommendation from Fidelity involves health savings accounts. These HSAs, Konish writes, “provide a triple tax advantage — contributions are made pretax, withdrawals for qualified expenses are tax-free and investment growth is also not subject to levies, according to financial advisors.” HSA balances can also be rolled over from one year to the next, enabling savers to reserve that money for their retirement years.
You’ve Explained the Problem, but Where’s the Solution?
We asked Rajiv Nagaich for his observations about the CNBC article.
“This story does an okay job describing the problem,” he notes, “but there’s almost nothing about a solution. Where’s the discussion of housing as it relates to medical care? Where’s any suggestion on choosing a geriatrician to make sure you get medical attention appropriate for an aging adult? Where’s the discussion about which Medicare plans reduce your out-of-pocket costs the most? None of that is here!”
(On a related note, in this recent Blog article, we offered several suggestions on covering the costs associated with long-term care. Also, another Blog article provides insight into making the choice between Medicare Advantage and Medigap plans.)
When It Comes to Healthcare Costs, Denial is Not a Strategy
A major feature of Rajiv Nagaich’s approach to retirement planning – a strategy he calls LifePlanning – is a clear-eyed, honest assessment of retirement realities. Instead of focusing on each facet of retirement in isolation, LifePlanning takes a holistic approach to the five major interconnected puzzle pieces: health, housing, finance, legal, and family.
“When people look at health care costs,” says Rajiv, “they tend to see healthcare in a silo, all by itself. They say, ‘I’ve got insurance, I’m fine.’ But health insurance by itself is not a solution. Same with finances: a big bank account all by itself is not the solution, either. You’ve got to consider all the aspects of retirement living to make sure your plan will produce the result you’re hoping for.”
Our invitation: come to a free LifePlanning Seminar and hear for yourself just how revolutionary Rajiv’s philosophy truly is – and what a departure from traditional retirement planning!
Rajiv Nagaich – Your Retirement Planning Coach and Guide
Rajiv Nagaich’s newest program on PBS, called Designing Your Ideal Future, is bringing Rajiv’s powerful message to Americans from coast to coast. This engaging and challenging PBS show is prompting thousands to take a fresh look at the type of planning that will help them succeed in retirement.
In this one-hour PBS special, Rajiv Nagaich takes viewers step-by-step through the principles of creating a retirement plan that truly supports the life you want to live. Instead of generic check-the-box paperwork, Rajiv reveals how to infuse your perspective — your values, goals, and priorities — into every legal document and life plan component so your plan becomes a living system for your future.
Designing Your Ideal Future includes insights from real-world planning examples and a live Q&A with Rajiv Nagaich that answers viewer questions about retirement planning, legal readiness, and family communication. It’s perfect for anyone approaching retirement, currently retired, or responsible for a loved one’s future care — and for those who want a clear, effective approach to planning that prioritizes personal choice and quality of life.
What about you?
You’ve heard Rajiv say it repeatedly: 70 percent of retirement plans will fail. If you know someone whose retirement turned into a nightmare when they were forced into a nursing home, went broke paying for care, or became a burden to their families – and you want to make sure it doesn’t happen to you – then these materials are your key to retirement success.
Visit your local PBS station’s schedule to find airtimes and learn how to access companion resources — including a free Legal Readiness Quiz and tools to help build your complete LifePlanning system.
Don’t remain among the millions of Americans sleepwalking their way into a retirement they never wanted. Instead, your retirement can be the exciting and fulfilling life you’ve always hoped it would be. Start by watching, reading and sharing Rajiv’s important message.
And remember, Age On, everyone!
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