Retiree Health Care Costs Expected to Double by 2040

Study: Retirees will need $6,200 annually for out-of-pocket health costs in 2040


Paying for health care in retirement is one of current worker's top retirement concerns. Although almost all Americans age 65 and older qualify for Medicare, the government health insurance program has premiums, deductibles, copays, and coverage gaps that leave some beneficiaries with substantial out-of-pocket expenses.

[See 8 Tips for Paying for Health Care in Retirement.]

Future retirees are likely to spend far more of their budget on health care expenses than current retirees. Median out-of-pocket costs are expected to grow from about $2,600 in 2010 to $6,200 in 2040 in constant 2008 dollars, according to a new Urban Institute report. About 10 percent of older adults with the most pressing medical needs will spend more than $14,000 per year on health care in 2040, even with Medicare coverage. The estimates assume that current Medicare policies and employer-based retiree health benefits will continue and use Medicare cost growth rates forecast by the Medicare trustees in 2009.The calculations exclude the cost of a nursing home, home care, and other types of long-term care, which could rapidly escalate an individual's health care spending.

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Retiree incomes are not likely to keep up with rising health care costs. “If health care costs grow at the conservative rates forecast under the Medicare trustees’ intermediate assumptions and current public and private policies continue, we project that out-of-pocket health care spending at older ages will rise much faster than incomes,” write Urban Institute researchers Richard Johnson and Corina Mommaerts. They predict that income for those age 65 and older will increase more slowly from $26,800 in 2010 to about $34,600 in 2040 in constant 2008 dollars.

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Health care expenses will consume a greater proportion of income for future retirees. The Urban Institute estimates that seniors in 2040 will spend a median of 19 percent of their income on health care in 2040, up from 10 percent today. And the share of adults spending over a fifth of their income on their health is expected to increase from 18 percent today to 35 percent in 2030 and 45 percent in 2040.

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Other researchers have calculated what retirees will need to save in order to pay for all their necessary medical care in retirement. Fidelity Investments estimates that a 65-year-old couple retiring in 2009 will need approximately $240,000 to cover out-of-pocket medical expenses throughout retirement. And the Employee Benefit Research Institute determined that a couple both age 65 in 2009 will need to save $210,000 to have a 50 percent chance of paying for health expenses and $338,000 to have a 90 percent chance of being able to afford all their medical bills.