The potential cost of healthcare as a retiree is important to consider well before an employee decides to retire. These costs can change as a result of regulations, inflation, new drugs, health risks, etc. Each year, Milliman develops estimates of retiree health costs in order to educate employees and retirees about the potential cost of healthcare over the course of retirement. This post outlines four different scenarios of projected costs to help prospective retirees plan appropriately.

(1) Projected costs for a healthy 65-year-old couple retiring in 2020

A healthy 65-year-old couple retiring in 2020 is projected to spend approximately $351,000 in today's dollars ($535,000 in future dollars) on healthcare over their lifetime. Expenses at age 85 are estimated to be 234% higher than at age 65.

(2) Projected costs for a healthy 45-year-old couple

A healthy 45-year-old couple is projected to spend approximately $505,000 in today's dollars ($1.4 million in future dollars) on healthcare over their lifetime.

Both scenarios (1) and (2) above have calculated these projected costs using the following assumptions:

• The health statuses of the retiree and spouse are assumed to be average for their entire life spans.
• The retiree and spouse are assumed to be male and female with life spans of 88 and 90, respectively.
• Nationwide average premiums and out-of-pocket expenses from a retirement age of 65 through life span for a Medicare Supplement Plan G and a standard Medicare Part D plan are used.
• Future medical trend is assumed to be 4.9% per year. This assumption is based on long-term estimates from a Society of Actuaries model, supplemented with Milliman research and converted to an annual equivalent rate.
• For calculations of present values in today's dollars, investment return of 3.0% per year is used.

(3) Average premium plus out-of-pocket cost at age 65

The estimated 2020 annual premium plus out-of-pocket cost for a healthy 65-year-old is $4,700.

Scenario (3) has calculated the out-of-pocket cost using the following assumptions:

• The health status of the retiree is assumed to be average. The average is based on a typical commercially insured population based on the Milliman Health Cost Guidelines^TM.
• A male or female age 65 is assumed.
• 2020 nationwide average premiums and out-of-pocket expenses at age 65 for a Medicare Supplement Plan G, Medicare Part B, and a standard Medicare Part D plan are used, based on the Milliman Health Cost Guidelines and premium information obtained from the Centers for Medicare and Medicaid Services (CMS).

(4) Portion of Social Security benefit spent on healthcare

A healthy 67-year-old couple is projected to spend 34% of their Social Security benefit on healthcare in 2020.

Scenario (4) calculations are based on the following assumptions:

• The health statuses of the retiree and spouse are assumed to be average. These averages are based on a typical commercially insured population based on the Milliman Health Cost Guidelines.
• The retiree and spouse are assumed to be male and female.
• 2020 nationwide average premiums and out-of-pocket expenses at age 67 for a Medicare Supplement Plan G, Medicare Part B, and a standard Medicare Part D plan are used, based on the Milliman Health Cost Guidelines and premium information obtained from the CMS.
• The December 2018 average monthly Social Security benefit at age 65-69 of $1,432.02 for retirees and $849.81 for spouses is used, with adjustments to 2019. Social Security cost of living adjustments of 2.8% in 2019 and 1.6% in 2020 are used.

Conclusion

The healthcare marketplace is volatile, partially due to legislative and regulatory changes, as well as the state of the drug pipeline, among other factors. Actuarially derived health cost estimates can help employees plan for the future and ensure that their retirement account is funded appropriately to reach the healthcare needs of the future.

This article first appeared in the Health and Group Benefits News and Developments: April 2020.

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