- Lifespans vary widely and longevity dramatically increases health-care costs
- When planning for retirement expenses, many savers rely on basic assumptions
- Plan providers have an opportunity to include more realistic longevity and health expenses in retirement calculations
Traditional planning is becoming less relevant
Experts suggest targeting a retirement income equivalent to 70%-80% of working income to sustain a lifestyle similar to that of an individual's working years. This estimate assumes that large expenses such as a mortgage or college funding are no longer a factor. What may be missing is the dramatic and increasing portion of income that will be needed for health-care costs for each year spent in retirement, which are currently projected to increase at over 5% annually.
Understanding longevity forecasts is the first step
Longevity and health-care costs complicate retirement calculations because they present such a wide range of potential outcomes. For individuals who are still in good health at age 65, life expectancy is significantly higher than it was at birth; 87 for men and 89 for women in the United States.* Health-care costs also vary widely and must be figured as averages from a range of possible outcomes — some individuals experience very high expenses, and others much lower. Healthy individuals ultimately have higher costs in retirement than individuals who are in poor health because their longevity is a greater driver of costs than shorter-term illness.
Retirement means no more employer insurance contributions
Workers who have access to employer subsidized health insurance, or who qualify for subsidies under the Affordable Care Act, may be unaware how much their insurance costs will increase in retirement when they become responsible for all premiums and out-of-pocket costs. Annual Medicare Parts B and D, supplemental insurance, dental insurance, and out-of-pocket medical costs in retirement for a couple aged 65 currently average $11,369 and are projected to be $39,208 for that same couple at age 85. For an average couple, those 20 years in retirement can mean $404,253 in health-care costs in today's dollars, without including long-term nursing care.*
Plan providers can provide education on health-care costs
Providing health-care cost estimates in tandem with retirement savings calculators allows savers to better see how much they need to save and to plan accordingly. Saving more before retirement, due to compounding of returns, is less expensive than paying costs as they occur in retirement.
Retirement plan providers can partner with plan sponsors to educate plan participants about projected long-term health care costs. This would help to give future retirees a realistic model for estimating expenses in retirement. Participants should be encouraged to save enough, early enough, when compounding can help make it easier to cover future costs.
*Healthview Services, 2017 Retirement Health Care Costs Data Report.
For informational purposes only. Not an investment recommendation.
This material is provided for limited purposes. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Putnam product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice. The opinions expressed in this article represent the current, good-faith views of the author(s) at the time of publication. The views are provided for informational purposes only and are subject to change. This material does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. Investors should consult a financial advisor for advice suited to their individual financial needs. Putnam Investments cannot guarantee the accuracy or completeness of any statements or data contained in the article. Predictions, opinions, and other information contained in this article are subject to change. Any forward-looking statements speak only as of the date they are made, and Putnam assumes no duty to update them. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those anticipated. Past performance is not a guarantee of future results. As with any investment, there is a potential for profit as well as the possibility of loss.
Diversification does not guarantee a profit or ensure against loss. It is possible to lose money in a diversified portfolio.
Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Investments in small and/or midsize companies increase the risk of greater price fluctuations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. You can lose money by investing in a mutual fund.
Putnam Retail Management.