How Much Will Your Health Expenses Be in Retirement?

5571634_sMy wife and I are trying to set up a budget for retirement, and we’re wrestling, in particular, with health-care expenses. How can we estimate what our medical bills will look like in the future?

An important—and vexing—question. For instance, a healthy person will have fewer and/or smaller medical bills in later life, right? Well…maybe not. As a recent study, “An Apple a Day: The Impact of Health Conditions on the Required Savings” noted, “Excellent health, ironically, can actually raise an individual’s lifetime health spending needs because of the likelihood that healthy 65-year-olds will live much longer.”

A good starting point (and a study worth reading in full) is the “2015 Retirement Health Care Costs Data Report” from HealthView Services Inc., a provider of health-care planning tools in Danvers, Mass. According to HealthView, a healthy 65-year-old couple can expect to pay, on average, $266,589 for insurance premiums and $128,365 for related expenses (dental, vision, copays and out-of-pocket bills) over their lifetime.

Another good resource—one with an emphasis on prescription-drug costs—is “Amount of Savings Needed for Health Expenses for People Eligible for Medicare” from the Employee Benefit Research Institute in Washington. The study estimates that a couple, where both spouses have median drug expenses, would need $259,000 to have a 90% chance of having enough money to cover health-care bills in retirement.

Note: Neither report accounts for possible long-term-care expenses. For that piece of the puzzle, check out Genworth Financial ’s 2016 “Cost of Care Survey.”

I am due to begin required withdrawals from my retirement savings. What are the advantages and disadvantages of an annual lump-sum withdrawal as opposed to a monthly payout?

In most cases, a required minimum distribution, or RMD, in the form of a single annual payout causes fewer problems—if you have a good amount of self-discipline.

Yes, monthly withdrawals act like a regular paycheck. But, to take a worst-case scenario, if you die midyear, your family must withdraw the remaining RMD, says Carolyn McClanahan, founder of Life Planning Partners Inc. in Jacksonville, Fla. Figuring out how much has already been withdrawn and how much remains to be withdrawn can (at times) be a hassle.

With a single lump sum, you can deposit the funds in a savings account and then arrange for monthly transfers to your checking account, creating (in effect) a regular paycheck. And if you wait until November or December to take an RMD—when you have a clear picture of all your income for that year—you can calculate your tax withholding on the withdrawal more accurately.

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