A major cost for retirees is health care. Though most retirees over age 65 are enrolled in Medicare, out-of-pocket costs can still be significant. Premiums for Medicare Part B, Part D and supplemental coverage; cost-sharing for medical services; as well as dental and vision examinations and treatments are paid out of pocket. Long-term care for those not covered by Medicaid are also out-of-pocket expenditures.

An analysis of data included in the 2002–2014 waves of the Health and Retirement Study (HRS) was conducted to determine how much of retiree incomes these expenses accounted for. The HRS is a national study of American adults ages 50 and older. This particular analysis was limited to survey respondents ages 65 and older and who were collecting Social Security benefits.

Not surprisingly, out-of-pocket medical spending varied widely. The median amount spent in 2014 was $3,681 (meaning half of survey respondents spent more and half spent less). Out-of-pocket expenditures ranged from a little over $2,000 for those at the 25th percentile to nearly $10,000 at the 95th percentile. Spending on cost-sharing (e.g., co-pays) rose considerably at the higher percentiles, jumping by nearly 50% between the 90th and the 95th percentiles.

Relative to Social Security benefits, out-of-pocket medical costs account for a high percentage of income. The average retiree spends nearly a third of benefit payments on premiums and other out-of-pocket medical costs.

Many retirees are fortunate to have more than just Social Security benefits as a source of retirement income [pensions, 401(k) plans, savings, etc.] Still, medical costs consume a significant portion of income. In 2014, premiums and other out-of-pocket costs consumed 11.4% of the median retiree’s total income. Notably, whether a retiree has retiree health insurance, a Medicare Advantage plan or only Medicare, the approximate percentage of income left over after out-of-pocket expenses are paid does not vary by much. Some of this is due to the relative differences in wealth and premiums.

Long-term care diminishes income, but not significantly. Respondents to the study’s survey who either resided in a long-term care facility or had a spouse residing in a long-term care facility spent, on average, approximately 19% of income on out-of-pocket medical costs.

“How Much Does Out-of-Pocket Medical Spending Eat Away at Retirement Income?” Melissa McInerney, Matthew Rutledge and Sara Ellen King; Center for Retirement Research at Boston College Working Paper, October 2017.

Discussion

Frank from Washington posted over 8 years ago:

I have tried to figure out what benefit this article has and I haven't found any. None of the comments are useful because the results all depend on a large number of factors. For example, what is the individual's income, medical insurance, long-term care insurance, and, health. Some tables that isolated these factors might make the article more useful.

Joseph from Aeizona posted over 8 years ago:

It would be far more interesting to see what early retirees aged 55-65 are paying for their healthcare. I would believe that is is substantially higher as a percentage of income. Healthcare and related expenses make up 45% of our budget.

Ted Lind from IL posted over 8 years ago:

The article seems to greatly underestimate the medical cost incurred by seniors. It said nursing home costs only consumed about 20% of income. I can't even imagine how that could be right. Nursing home costs in our area are close to $100,000 a year. That is about 90 percent of income. Fortunately I have a long term care policy but it will expire in a couple of years. I think who ever did this study needs to take a closer look.

Rich from Arizona posted over 8 years ago:

I concur with Joseph. I'm 60 and healthcare expenses were about 25% of my income in 2017. Further, I expect significant premium increases in my private insurance until I reach the age for Medicare in 2023. I have reviewed Medicare premiums, supplemental plans and Part D plans, and based on current numbers, the percentage of my income which would be spent on medical care would drop dramatically at age 65.

John from NJ posted over 8 years ago:

The article focuses on retirees eligible for Medicare which will be a very different scenario than those retired before 65. Health care is a costly aspect of life in modern times where procedures and equipment only imagined 20 years ago are now commonplace in countries with a prosperous middle class. Cost of care has increased with most lifetime medical expenses incurred in the last few years of ones life. Unless you are fortunate enough to have supplemental healthcare coverage in retirement through your former job, do not expect Medicare to be adequate if you are used to employer supplied health coverage. Unless you can afford between $5000 and $10,000 annually for Part B and D and Supplemental plans + deductibles you will need to enroll in Medicare Advantage plan which limits your access to Providers. Medicare is no longer the savior many of look forward to as we slow down and end our working careers. Instead, Medicare has become the oft despised HMO for many seniors who have no economic choice but enroll in a Medicare Advantage plan.

John Knox from AL posted over 8 years ago:

Fidelity Investments estimate the medical costs after retirement with Medicare are approximately $250,000.00.

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