Planning For Health as You Transition into Retirement

My Investments May 05, 2017

Unsurprising facts: Health care costs are rising, and retirement funds for medical expenses are shrinking. In the past, retirees could rely on company-sponsored health plans, pensions, and low Medicare premiums, but today most Americans will be retiring without these kinds of safety nets in place.

HealthView Services projects that a healthy 65 year-old couple that retired in 2016 will pay $377,412 in health care costs during retirement.¹ Those costs increase exponentially for pre-retirees: a 55-year-old couple planning to retire at 65 will need to save $465,907, while a 45-year-old couple will need $592,275. What’s more, the current rate of health care inflation means that future retirees may have their Social Security income completely absorbed by health-related expenditures.

If you’re a pre-retiree, now is the time to plan, not panic. If you stay informed and understand the factors that could contribute to a higher cost of health care, figuring out how much you’ll need to save—and making a plan to save it—will become less daunting. Here are four tips to help you kickstart your health care savings (and your health in general) in pre-retirement.

Tip #1: Don’t just save—plan to save for health care

In spite of increasing life expectancies, it turns out that Americans seriously underestimate how long they will live. Nearly half of the participants in University of Michigan’s Health and Retirement Study who thought they had zero chance of living to 75 made it—which likely means they did not budget sufficiently for retirement.² We aren’t used to thinking of staying alive as a risk, but longevity is the biggest driver of total health care costs. Healthy retirees end up paying more, as both premiums and out-of-pocket expenses rise with age. A Kaiser Family Foundation report found that Medicare recipients ages 85 and older spent an average of three times more on out-of-pocket on services than those ages 65 to 74.³ And women tend to live longer and pay more than men.

A solution to all of this? Set up a concrete health care savings plan, with an emphasis on concrete. Decades of psychological research have established that abstract goals are more difficult to accomplish than concrete ones.⁴ Without a specific plan of action, people are more likely to procrastinate or avoid their goal entirely. So, when it comes to retirement health care savings, specifically defining your target is crucial to success. And pre-retirement is a perfect time to define that target, if you haven’t done so already.

Tip #2: Put away dollars for health care in pre-retirement

Pre-retirees should consider incorporating Health Savings Accounts and Long-Term Care Insurance into their savings plans. Insurance products purchased during pre-retirement tend to have lower premiums. This is particularly true of Long-Term Care Insurance, which covers the cost of a nursing home, assisted living, or in-home care, none of which are covered under Medicare. Don’t think you’ll need long-term care? There’s a good chance you’re underestimating that risk, too.⁵ Begin to look at options during your 50s, and purchase by your early 60s; you have to be in good health to buy Long-Term Care Insurance, and premiums increase significantly with age.

It may seem overwhelming, but specifically designating a portion of your retirement savings for future health expenses can actually help you save. Research has long indicated that placing money into different categories makes people less likely to use that money for a purpose other than the one we labeled it for.⁶ Setting aside separate funds for health care could help you to save—and prevent you from having to choose between going on a trip or paying for your prescriptions later on.

Tip #3: Plan to be flexible

If your retirement strategy hasn’t accurately taken health care expenses into account, it’s not too late to begin saving.⁷ No one knows what the future of health care policy will hold. There are big decisions to be made about the ACA, Medicare and Social Security, but in this time of uncertainty, one thing is certain: health care costs will continue to rise. Understanding the big picture is the only the first step. Develop an approach that suits your individual needs—and then be ready to change it.

Tip #4: Touch your toes

Focusing on healthcare during pre-retirement isn’t all about savings accounts and Medicare, you know. Pre-retirement is also the perfect time for Americans to start practicing preventative health care. This means things like improving nutrition, exercising more, finally quitting that smoking habit, getting adequate sleep, reducing alcohol consumption and setting fitness goals for yourself. Entering your retirement years in good physical health will enable you to live a more active life in retirement and reduce your medical expenses—and sure, sneak in that extra game of golf before happy hour.

With contributions from Karen Shimmin of the Hippo Thinks research network


U.S. Bank does not offer insurance products.

Sources cited:


² University of Michigan’s Health and Retirement Study is a longitudinal project sponsored by the National Institute on Aging and the Social Security Administration. The study director is Dr. David R. Weir of the Survey Research Center at the University of Michigan's Institute for Social Research.

³ Cubanski, Swoope, Damico, and Neuman. “How Much Is Enough? Out-of-Pocket Spending Among Medicare Beneficiaries: A Chartbook.” Kaiser Family Foundation. July 21, 2014.

⁴ Emmons, Robert. “Abstract versus concrete goals: Personal striving level, physical illness, and psychological well-being.” Journal of Personality and Social Psychology. February 1992.

⁵Broyles, Sperber, Voils, Konetzka, Coe, and Houtven. “Understanding the Context for Long-Term Care Planning.” Medical Care Research and Review. November 9, 2015

⁶Thaler, Richard. “Anomalies: Saving, Fungibility, and Mental Accounts.” Journal of Economic Perspectives. Winter 1990.

⁷ Healthview Insights. “Closing the Retirement Health Care Costs Planning Gap: THE NEXT RETIREMENT PLANNING CHALLENGE.” 2015.