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How do I estimate what my health care costs will be in retirement?

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Use these rough numbers to start making some important decisions.

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 retiree health care costs now can help you plan properly for your future. Answer some key questions.

Determining your health care costs in retirement will depend 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?

Each person's answers to these will be different, of course. But we can take existing data to help you find some ballpark estimates.

Calculate the costs.

Let's start with some educated guesses regarding inflation and investment returns. We estimate that fast-growing 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 can expect your portfolio to grow at around 7% per year on average over the long term.

To figure out how much cash you'll need to cover your health care through retirement, let's plug in some numbers. In the first scenario, we'll assume your retirement will last 30 years, and your first-year health costs will average $7,500. The end result will be the lump sum you'd want at the start of your retirement. We’ve provided two additional scenarios here as well.

How much you may need to cover health care through retirement.

  Scenario 1 Scenario 2 Scenario 3
First-year costs $7,500 $7,500 $10,000
Health care inflation rate 8% 8% 8%
Rate of return 7% 7% 7%
Time horizon 30 years 25 years 30 years
Lump sum required1 $260,000 $210,000 $345,000

Consider alternatives to cash up front.

Not everyone has $260,000 to set aside for health care. 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. Make sure you have cash reserves or easy-to-liquefy assets to cover costs.

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