For most Americans looking ahead to retirement, future health care costs represent a great unknown. In polls, these costs regularly top their list of worries. Much of the concern rightly centers on something that may never happen—namely, a debilitating illness. Too often overlooked is the more likely budget buster: the rising costs of basics like prescription drugs, tests and emerging services.
In a report this week, AARP found that the price of drugs most often used by seniors rose 26% from 2005-2009. That is roughly double the rate of inflation, a troublesome calculus that will ring familiar to anyone that ever saved for their kids’ college education. The drug industry disputes AARP’s findings, saying they do not properly account for the steep price drop in many drugs coming off patent, and for discounts and rebates. AARP says it focused on the most popular drugs like the prostate treatment Flomax, which nearly doubled in price; and Advair and Aricept, which saw price hikes of 40%.
But even if the price of treatments were to remain constant, the expense would eat up an increasing chunk of your retirement budget simply because you’ll use them more often. In a recent roundtable discussion, Dr. Joseph Coughlin, director of the Massachusetts Institute of Technology’s AgeLab, had this to say:
“110 million Americans have at least one chronic disease; 60 million have at least two; and 20 million won the lottery ticket of five chronic diseases. This is your future. You are going to be living longer. You will be ill, but you won’t necessarily be sick; that is, you will have diabetes, hypertension, asthma—pick a few diseases of choice, see how well you chose your parents. …How much is it going to cost you to manage that illness? We haven’t even begun to imagine the new cost of health care, but the new services that are coming are going to be all out-of-pocket. They are not going to be covered right away by government, if at all.”
Many people planning for retirement assume that Medicare will cover the vast majority of their medical expenses. But that just won’t be the case. One study found that out-of-pocket healthcare costs rise with each year of retirement and that past age 85 routine medical costs suck up 30% of income.
Fidelity Investments estimates that a 65-year-old couple with Medicare coverage will need $230,000, on average, to cover medical expenses in retirement. That does not include the costs of long-term care. Other studies are even more depressing. For a healthy couple turning 65 this year to be reasonably certain 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 the Employee Benefit Research Institute. Meanwhile, a healthy couple reaching age 65 in 2018 will need $511,000, EBRI found.
These are staggering numbers and they do not even address the costs of catastrophic illness, the scary wild card that so many fixate on. Any retirement plan needs to take them into account.