Looking forward to a comfortable retirement? Don't forget to factor in the cost of health care.
Health care costs are a huge issue for retirees, says Cheryl Matheis, senior vice president for health strategy with AARP. Recently, she says, several different organizations tried to calculate the nest egg retirees would need in order to pay out-of-pocket health care costs.
While the six-digit answers varied, "They were all reasonably consistent -- it's a lot of money," says Matheis. "Particularly if people are retiring before 65, before they qualify for Medicare," she says.
Assess the situation
How much any individual will need depends on their own situation but can be looked at in three general scenarios:
Retirement at 65 or later
For a healthy couple turning 65 this year to be reasonably certain (90 percent) they'll be able to meet all of their out-of-pocket health care costs during retirement, they would need at least $305,000, according to one study by the Employee Benefit Research Institute, or EBRI. Unfortunately, the average amount sitting in a 401(k) account for 60- to 65-year-olds, was $190,000, according to another EBRI study.
The younger you are the more expensive it gets. A healthy couple with the same security goals reaching age 65 in 2018 will need an estimated $511,000 for out-of-pocket health care expenses, the study found.
The numbers "are large," says Paul Fronstin, director of the health research and education program at the EBRI. "I'm sure most people aren't prepared for it."
Another study, by the Center for Retirement Research at Boston College, examined the amount of money retirees would have put into an annuity at the start of retirement to recoup their healthcare expenses each year. It found:
- A 63-year-old couple, retiring in two years, would need $200,000.
- A 43-year-old couple, retiring in 22 years, would need $380,000.
"This is a lot of money that people have to have, and people don't recognize that when they think about retirement," says Matheis.
"You're going to see people staying in the workforce or going back into the workforce just for the health care benefits," says Sandy Praeger, president of the National Association of Insurance Commissioners. "I think it's becoming more common."
But a person's health, attitude, genetics and situation can make a big difference. "You can't assume everyone's average," says Fronstin. "Because they're not."
Carolyn McClanahan, who is both a Certified Financial Planner and a medical doctor, agrees. Regular exercise, a good diet and healthy habits not only can prevent, but reverse a host of health problems. And that gives consumers a financial advantage, too. McClanahan tells her clients, "The best way to take care of your health care costs is to take care of your health."