Estimate Retirement Expenses – Healthcare Will Shock You

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Have you ever taken time to estimate what your future expenses for retirement will be?  A critical measurement to understand if you will be ready to retire is knowing what your expenses will look like.  Understanding what your current expenses are is a good first step.  The next key factor is knowing what aspects of your life will be different in retirement.  The expenses you have today will not be the same expenses you have in retirement.

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5 Decreases to Expenses in Retirement

There are several expenses that will likely decrease in retirement. Below are 5 key expenses in retirement that you should calculate into your estimate for future expenses.

1.       Personal Insurance and Pensions – In order to retire, you must be saving a portion of your income.  In retirement, you will no longer need to be saving for retirement so the expense for pensions, 401ks, brokerage accounts, etc. go away.

2.       Housing – With any luck, by the time you’ve reached 65, your mortgage is paid off and the only housing expenses you have are taxes and homeowner’s insurance.  Some retirees may even move to smaller homes that are easier to maintain since their children have moved out. 

3.       Transportation – Many people drive to and from work every day.  This increases the wear and tear on a car and drives up fuel costs.  Less use of a car means less need to replace an existing car and replacing a car can be quite expensive.  Married couples might even be able to downsize to one car saving money on car insurance each month.

4.       Food – Eating out less drives the largest impact in this category.  Spending money for lunch at work on days you don’t bring lunch from home is all but gone.  You will actually have time to plan and prepare meals to cook. The need for grabbing take out on your way home from work because you’re too tired to cook will cease to exist.

5.       Education – Oh, the things you do for your kids.  Paying for tutoring, private school, or prep classes for college and investing in 529 plans takes a toll on your expenses.  For the average family these expenses will disappear in retirement.

Estimate Increase in Future Healthcare Expenses

On the flip side, while most expenses decrease in retirement the single greatest expense will be healthcare and should not be underestimated.  In 2018, according to Fidelity, the average cost of healthcare in the US for a couple retiring at age 65 will be $280,000.  That’s a big number.  Let’s break it down to how much you will need per year.  The Fidelity study projects men will live to 87 and will need $133,000 while women will live to 89 and will need $147,000.

retirement healthcare expenses

For a man, the $133,000 will be spread over 22 years and will cost on average $6,045 per year. 

For a woman, the $147,000 will be spread over 24 years and will cost on average $6,125 per year.

That is roughly $500 per month per person.  For many couples, that is close to a monthly mortgage payment.  We’ll likely see larger medical expenses later in retirement.  This may mean in the first 10 years of retirement you only need $4,000 a year where in the later years you need $8,000 a year.

Do you have access to a Health Savings Account (HSA)?  Read here why your HSA is pure gold when it comes to retirement savings!

Estimate Future Expenses for Medicare

What about Medicare?  How does that play into the picture?  The $280,000 includes premiums for individual costs under Medicare plans part B and D.  There are 4 parts to Medicare:

Part A – Covers institutional stays in hospitals for up to 90 days.  This is free if you have paid Social Security taxes for 40 quarters (10 years).

Part B – Covers doctor visits.  There is a monthly premium for this that is paid out of pocket.  This is included in the estimated $280,000.

Part C – Allows you to choose a Medicare Advantage plan if you have Medicare Part A and B. This would be an additional expense to the estimated $280,000.

Part D – Covers prescription medication.  Out of pocket expense varies.  This is included in the estimated $280,000.

It’s worth noting that long-term care is not included in the $280,000 estimate nor is it covered by Medicare.  Living in a retirement community will cost you extra.

Unless you’re getting ready to retire in the next couple of years, the $500 per month per person estimate won’t be enough.  Healthcare costs increase every year along with almost everything else.

The effect Inflation has on Future Retirement Expenses

That brings us to the cost of inflation.  Previously I explained how a $100 picnic table today would have cost $66 20 years ago

estimate retirement expenses

Unfortunately, we don’t know exactly what future inflation rates will look like.  It is fair to assume a 2-3% increase per year based off historical data.   Using this calculator, I determined that same $100 picnic table today would cost $164 20 years from now with an average inflation rate of 2.5%. 

Using an average inflation rate of 2.5%, the $280,000 in healthcare costs today could be a shocking $458,813 in 20 years.  Certainly, none of us should overlook the cost of inflation when determining how much you we need saved for retirement.

Therefore, I propose once you’ve determined how much you will need for retirement per month or per year in today’s costs, you then plop that number into the inflation calculator (referenced above).  It will give you an idea of how much that amount will be in the future.

Estimate How Taxes on Traditional 401K/IRAs effects Future Expenses

Taxes must be factored into the equation.  Depending on how you plan to fund your retirement this may or may not be a huge hit to your expenses in retirement. 

Taxes won’t be as impactful for those who will be funding retirement with rental properties or Roth IRA’s (taxes were taken out at the time the money was invested).  In contrast, for those using traditional 401k’s or similar taxable accounts, taxes haven’t been paid yet and will have to be paid in the year they are withdrawn.

For example:  $50,000 in yearly expenses, taxed at a rate of 22% would require $61,000 per year in retirement.

Retirement Expense Planning Worksheet

Use this expense tracker to record current expenses and estimate future expenses.  This tracker includes tips on how certain expenses will change for the better or worse in retirement.  Get started recording your current expenses today and feel better prepared for tomorrow.

Conclusion on Future Retirement Expenses

There are several variables to consider when planning for retirement. Lots of research and preparing can’t provide the exact number needed for retirement.  However, it can provide a greater level of confidence in the amount needed. 

Therefore, putting a quantitative value to a goal makes it easier to strive for.  Take the time now to estimate what your future expenses will be in retirement.  Subscribe here to join me on my journey to saving for retirement where I plan to continually step into more time and money.

tips for financial freedom on retirement savings plan ideas plus expense worksheet

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