How much do we need for healthcare after retirement?

Healthy fully-employed young professionals may not pay much attention to healthcare cost. However, that will be an expensive part of retirement savings. Fidelity Investments have released its annual study for retiree healthcare cost for seven years. It is reported that “a 65-year-old couple retiring this year needing about $215,000 to cover medical costs after they stop working”. I remember some young people were arguing if 1 million dollars are enough in 30 years for retirement. This report certainly shed a light on the answer: you will need $521,861.43 in 30 years assuming healthcare cost increases at a historical annual inflation rate of 3%; $1,270,281.51 in 30 years if healthcare cost increases at an average of 6.1% annual rate as in the last seven years.

And the scary part is the conservative assumptions of Fidelity’s estimate. It’s not all healthcare cost.
1. It doesn’t include over-the-counter medications, most dental services and long-term care;
2. It assumes retirees have no employer-provided health care coverage;
3. It projects life expectancies of 82 for men and 85 for women.

People may wonder if we can get employer-provided health care coverage after retirement in 30 years. Let’s look at this trend identified by the same study: “between 1988 and 2006, the share of large employers offering retiree health benefits declined to 35 percent from 66 percent. Employers also have shifted more of the costs to retirees through higher premium contributions and higher cost-sharing requirements.” It does not look like that most of us can get it!

Fidelity actually has a breakdown of annual medical expenses.

Type of Expense Annual Cost Monthly Cost
Medicare A Premium $0 $0
Medicare A Deductible $231 $19
Medicare A Co-Pay $51 $4
Medicare A Skilled Care $77 $6
Medicare B Premium $1062 $89
Medicare B Deductible $83 $7
Medicare B Co-Pay $902 $75
Other misc. $293 $24
Dental/Vision/Hearing $388 $32
Medicare Supplement (Medigap) F2 $2,244 $187
Prescriptions (Medicare Part D)3 $1,300 $108
Total: $6,631 $551

Are you ready?