Health Care Costs in Retirement
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After years of planning and saving for retirement, the last thing you want is for unexpected medical bills to undo your hard work. Estimating your potential health care costs during retirement can help you plan properly for your future.
Estimating your health care costs in retirement depends on several key variables:
- How much health care will you need?
- How long will you need it?
- Will your savings and investments provide you with enough return to pay for it?
Having enough savings to cover your health care in retirement could be a challenge; you might prefer to pay your health care premiums using your retirement cash flows or investment returns. But keep in mind that investment returns fluctuate, so it’s a good idea to have cash reserves or liquid assets to cover costs.
What you can do now:
- Get help deciding if you need long-term care insurance.
We estimate that health care costs will have an inflation rate of 8% (roughly triple the projected Consumer Price Index). However, if your money is invested in a moderate portfolio, you might expect your portfolio to grow at around 6.3% per year on average over the long term.
The three scenarios below assume varying rates of return and lengths of retirement; the lump sums are what you'd want to have saved at the start of your retirement.
| Scenario 1 | Scenario 2 | Scenario 3 | |
|---|---|---|---|
| First-year costs | $10,000 |
$10,000 |
$10,000 |
| Assumed health care inflation rate | 8% |
8% |
8% |
| Assumed rate of return | 5% |
5% |
4.2% |
| Time horizon | 30 years |
25 years |
30 years |
| Lump sum required1 | $465,000 |
$358,000 |
$570,000 |
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1. The formula is for the present value of a growing annuity with a series of annual payments: $10,000 x [(1 – ((1.08) / (1.05))30) / (–0.03)] x 1.05 = $464,895.16. Source: "Retirement and Health Insurance—What You Need to Know" by Rande Spiegelman, October 23, 2013. Please note that these scenarios are based on hypothetical assumptions which cannot project or predict the return of any specific investment(s) or the actual inflation rate. Your results will vary. Charges and expenses that would be associated with an actual investment are not reflected in the assumed rate of return.
Long-term care insurance benefits may be subject to limitations.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Where specific advice is necessary or appropriate, Schwab recommends that you consult with a qualified tax advisor, CPA, financial planner, or investment manager.
The type of securities mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Data contained here is obtained from what are considered reliable sources; however, its accuracy, completeness, or reliability cannot be guaranteed.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Examples provided, including statistical simulations, are provided for illustrative purposes only and are not intended to imply future results you should expect to see. Past performance is no guarantee of future results.
Brokerage and insurance products:
• Are not deposits
• Are not FDIC-insured
• Are not insured by any federal government agency
• Are not guaranteed by the bank or affiliates of the bank
• May lose value
Charles Schwab & Co., Inc., a licensed insurance agency, distributes certain insurance and annuity contracts that are issued by insurance companies that are not affiliated with Schwab. Not all products are available in all states