Include Healthcare in Retirement Savings

Despite its large price tag, few people set aside retirement savings for healthcare expenses.

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Out-of-pocket health expenses are the largest uncontrollable expense most people will face in retirement. For an average 65-year-old couple, the projected price tag is about $250,000. Yet less than 30 percent of people still working set aside retirement dollars specifically for healthcare, according to a recent survey sponsored by First Command Financial Services. That's not so surprising. Most people view their retirement accounts as funding all retirement expenses, and don't look at separate categories.

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The survey also found, however, that people continue to have an unrealistically low estimate of what their health expenses will be when they retire. Only one in five people surveyed thought they would need to save more than $100,000 for retirement healthcare. Nearly as many thought the amount would be zero! This is worrisome.

I congratulate anyone who thinks enough about healthcare to make it a formal part of their retirement savings plans. But even among the roughly 30 percent who do this, only 21 percent set aside more than $300 a month. The same percentage saves nothing, and another 20 percent sets aside less than $100 a month.

What's more, the views of employees of all ages did not differ greatly from employees who should be the most concerned about retirement -- those people aged from 50 to 64. Even 18 percent of them said their retirement health care expenses would be zero!

[See It's Time to Review Your Medicare Options.]

The U.S. Bureau of Labor Statistics last month released a review of healthcare spending, based on its most detailed look at consumer spending in 1998, 2003 and 2008. Average healthcare spending for consumers aged 65 and older rose from $2,812 in 1998 to $3,624 in 2003 to $4,658 in 2008. However, senior incomes kept pace with the increase. Healthcare spending as a percent of total consumer spending for this group rose from 12.6 percent in 1998 to 13 percent in 2003, and then dipped a bit to 12.9 percent in 2008. In the latest year, health insurance payments took 63.5 percent of the healthcare dollar for a typical consumer aged 65 and older. The shares for other expense categories were 18.6 percent for medical services, 15 percent for prescription drugs, and 3 percent for medical supplies.

The First Command survey was also taken last year, and found that fewer people are seriously concerned about healthcare costs now than they were in 2009. Last year, 40 percent of respondents said they were either "extremely" or "very" concerned about paying for healthcare in retirement. This year, only 34 percent felt that way. At the same time, however, people this year expected health expenses to be much more than in last year's survey. Go figure.

This year, people said they expected annual out-of-pocket health expenses to average $10,158, compared with $6,545 in 2009. However, this increase was fueled by a small number of people who projected very large expenses. The median annual cost of out-of-pocket healthcare expenses (meaning half the respondents said more and half less) was projected at $2,500 this year versus $2,455 in 2009.

Among the older group of employees aged 50 to 64, 34 percent included healthcare in their retirement savings plans. Of these, 25 percent set aside more than $300 a month. Both figures are larger than responses from all age groups. Still, 19 percent of older workers who recognized healthcare as a distinct retirement need set aside no money in this year's poll, which was taken in July. Last year, the figure was 31 percent, so perhaps more older workers are getting concerned about their future medical bills.

[See 7 Spending Cuts You Might Not Even Notice.]