Planning ahead can help take the sting out of future medical bills.
It can be hard to think about what your health might look like as you age, but with health care costs climbing, it’s critical to plan ahead.
According to a report from RBC Wealth Management , the projected lifetime cost of care for an average 65-year-old couple is $683,306—and that doesn’t factor in long-term care costs, which could be upwards of $100,000 a year.
Most Americans know medical care is expensive, with 80 percent of respondents to an RBC Wealth Management survey saying they are worried about how they’ll pay for those costs in retirement. However, many aren’t doing anything to calm their own fears. Just 56 percent of survey respondents said they’ve factored the cost of care into their wealth plans, while half of those who have taken it into account feel as though they’re underestimating the price tag.
Indeed, they are. When asked how much they expect to spend on routine health care at age 65, respondents said about $2,700 a year, on average. In reality, the Bureau of Labor Statistics estimates at age 65, the annual spend on health care is close to $6,500 per person ($13,000 for a married couple).
“These are out-of-pocket costs,” says Griffin Geisler, a wealth strategist for RBC Wealth Management–U.S. “Medicare only covers certain expenses, which means people have to find other ways to fill that gap. The costs start to add up quickly.”
One reason for the higher costs is inflation—health care expenses rise faster than other costs—which is why RBC Wealth Management uses a five percent inflation number for clients who are near or in retirement—but it also has to do with people living longer and the need for more advanced treatments.
“This increase in costs is largely due to greater demand driven by longevity and advances in treatment and technology,” the report says. “For example, so-called maintenance procedures like joint replacement and cataract surgery are increasingly common, but carry significant price tags as they impact greater numbers of baby boomers.”
The report points out premiums, deductibles, copays and out-of-pocket costs are also climbing. Even when Medicare coverage is factored in, by age 65 health care expenditures will likely account for 15 percent of an individual’s overall spending.
Clearly, health care is expensive, so why aren’t more people planning for those costs?
“Part of it is denial,” Geisler says. “Healthy people don’t want to think about what life will be like when they’re older and not as healthy.”
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With costs only rising from here, it’s crucial to plan ahead and start accounting for future medical expenses in your overall wealth plan, just like you would a house or an annual vacation, says Angie O’Leary, head of Wealth Planning at RBC Wealth Management–U.S. Don’t forget to include at least a five percent inflation rate in any calculations.
Once you have a realistic view of how much you might spend on health care per year, the next hurdle is figuring out how to pay for it. That’s where your financial advisor can help.
As with any kind of saving, your most valuable asset is time. The more money you can sock away early in your working years, the better off you’ll be. This is especially true with health care, as costs rise exponentially with age. According to the report, a healthy couple between 65 and 74 spends about $13,000 a year on health care. That annual spend jumps to $23,000 between 75 and 84 and rises to $40,000 over the age of 85.
“You might think that having $1 million in retirement will last a long time, but understand that you’re going to have to spend a chunk of that on health care,” O’Leary says. “If you can get in front of it before you’re retired, then you’ll be able to do some catching up and adjust where you need to.”
As the data shows, though, it’s one thing to know health care is expensive and another to actually plan for those costs. Fortunately, there are a number of ways to save.
Health Savings Accounts (HSAs) are powerful tools to save for future health care expenses, and they come with a rare triple tax benefit: contributions are made on a pre-tax basis, investments can grow tax free and withdrawals for qualified health care expenses are also tax exempt.
You can withdraw money from an HSA at any time, but real value comes when it is used as an investment vehicle for the future. Annual contribution limits are $4,150 a year for individuals and $8,300 for families, but the money carries over from year to year, and you can invest the assets so that the balance can grow into a significant reserve to fund future health care costs.
Another option is to invest in a Roth 401(k). Contributions are taxed when money is initially deposited, but you can withdraw your money tax free in retirement. If you start saving early, the tax hit will be lower, and your dollars will be able to compound tax free for decades.
“People should maximize any kind of tax-efficient savings vehicle as much as possible,” Geisler says.
There are other options to consider, such as buying disability insurance and taking advantage of company-provided benefit packages. Many employers are also offering wellness programs that address physical and emotional well-being, and in some cases offer incentives to promote healthy behavior changes.
In retirement, health and wealth intersect, and taking steps today to bolster your physical and financial fitness will help you build a strong base for the future, Geisler says.
Thanks to advances in medicine and technology, retirement can now span decades, and determining the cost of medical care over an increasingly longer span of time can be a challenge.
Remember that planning for the future is not a one-time event. Your needs will evolve over time, as will the health care landscape.
As you age your health circumstances can change quickly, shifting priorities and objectives. This may mean adjusting your plan or changing course. By staying informed and revisiting your plan regularly, you can take control of your health care in retirement.
Read more from our RBC Wealth Insights report Taking control of health care in retirement.
This article was updated in October, 2024.
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