Employees Need Help Planning for Retirement Health Care Costs

September 5, 2014 (PLANSPONSOR.com) - An individual departing the workforce today will see out-of-pocket health care costs grow 7% annually throughout retirement, an analysis from J.P. Morgan suggests.

While the rate of cost increases for health care shows signs of slowing, J.P. Morgan analysts say individuals retiring without an effective plan in place to meet growing health care costs could face serious financial hardship late in life. Increasing health care expenses are a challenge for participants in both defined contribution (DC) and defined benefit (DB) retirement plans, the analysis shows. DC participants without adequate savings can easily deplete their retirement accounts paying for health care, while those lucky enough to have a lifetime pension can see their income stream outpaced by ballooning expenses.

Sharon Carson, a retirement strategist at J.P.  Morgan Asset Management, tells PLANSPONSOR the financial advisory industry is starting to pay closer attention to health care and other specific costs clients face in retirement. She says it’s an encouraging trend in terms of improving participant retirement outcomes, but more engagement and innovation is clearly required to ensure retired plan participants will be able to pay for the health care they’ll inevitably need.

Carson says advisers can help participants understand their retirement savings will face huge pressure from things like health care costs. For example, advisers could help impart the message that even solidly middle class retirement plan participants will likely see lifetime retirement health care costs exceed the total value of their anticipated Social Security benefits.

According to the Retirement Health Care Cost Index from HealthView Services, retirement health care costs will increase from 69% of Social Security benefits for a couple retiring in one year to 98% of Social Security benefits for a healthy couple retiring in 10 years. For couples retiring in 20 years, 127% of Social Security benefits will be required to cover health care costs, and couples retiring in 30 years will need 190% of their Social Security benefits to cover lifetime health care costs, should current trends hold.


For an average healthy couple retiring in 2015, index data shows retirement health care costs will amount to approximately $366,599 in today’s dollars. In another 10 years, reflecting estimated health care cost inflation and Social Security cost-of-living adjustments, lifetime costs will rise to approximately $421,083 in today’s dollars.

These are the key lessons to impart to retirement plan participants, Carson says. One piece of good news to share, however, is while health care expenses will almost certainly rise as life goes on, other expenses fall, especially things like mortgage debt and the costs of supporting children.

“For younger participants, it’s about helping them to save early and save as much as possible,” she explains. “You must make the case that Medicare and the other programs are too far away and could change substantially by the time this group hits retirement. So it’s a message of personal accountability and not relying on the government or an employer to support the health care costs in retirement.”

For participants who are older and closer to the retirement date, it’s time to become more detail oriented. “The older client group requires more specific spending plans that look at what expenses will be there in retirement,” she says. “Maybe in a few years the participant will have their mortgage paid off, the kids will be out of college, maybe some other debt will be paid off, suggesting the growth in health care costs may not be so devastating. Or the participant may find their outlook is bleak, so they will need help budgeting and figuring out how they can invest more and better time their retirement.”

Helping participants effectively time Social Security is another big need, but Carson says this can be challenging. An adviser can also help identify the discretionary expenses that can be pushed down as health care costs go up.

“The important thing … is to help individuals think ahead about these issues—much of the hardship can be reduced by effective planning, especially when the individuals are younger and have a lot of time to prepare,” Carson says.