The Average American Retiree's Healthcare Expenses Might Surprise You

Don't let medical expenses stress you out in retirement. Image source: Getty Images.

According to a study by HealthView Services, the average 65-year-old couple who retired in 2015 can expect to spend nearly $395,000 on healthcare expenses throughout their retirement. And, this is expected to rise significantly over the next decade, when post-retirement healthcare spending is expected to swell to around $464,000. Here's the alarming reality about healthcare expenditures in retirement, and what you can do to prepare for it.

Healthcare will cost how much in retirement?

For a healthy 65-year-old couple retiring in 2015, lifetime healthcare premium costs for Medicare Parts B and D, as well as a supplemental insurance policy, are expected to be $266,589. Including other healthcare expenses such as co-pays, dental care, vision, and other out-of-pocket expenses, the total rises to $394,954. And, for a 55-year old couple retiring in 10 years, lifetime costs are expected to swell to $463,849.

Even more alarming is that all of these figures are in today's dollars, meaning that they don't account for the effects of inflation. When projected inflation is taken into account, the lifetime total for a 65-year-old couple is about 45% higher.

Note: The different amounts for men and women are mainly due to the longer life expectancy for women. Data source: HealthView Services..

In addition, this report makes several assumptions that may or may not apply to you. I already mentioned it assumes both spouses are healthy when entering retirement. If this is not the case, healthcare costs can obviously be much higher. It also assumes the couple's retirement income is less than $170,000 -- for income brackets above this threshold, Medicare surcharges can add as much as $279,377 over the course of a retiree's life. Finally, it assumes that the male spouse will live until 87 and the female until 89. According to Vanguard, there is a 45% chance that one spouse of a 65-year-old couple will live to 90, and a 18% chance one will live to 95. Longevity can add significantly to healthcare costs, which generally increase as you get older.

Sadly, Social Security cost-of-living adjustments (COLA) have lagged behind healthcare inflation, and are projected to continue to do so. As a result, when today's new retirees turn 70, they can expect to be spending 43% of their Social Security income just to cover healthcare costs. By age 85, the vast majority (83%) of their Social Security income could go to healthcare.

A smart way to prepare

It may sound obvious, but the best way to prepare for increased healthcare costs is to save more money now. An effective way to do this specifically for healthcare expenses is with a Health Savings Account, or HSA.

An HSA is intended to help people with high-deductible health plans pay for their out-of-pocket medical expenses, but there are some features of these accounts that make them great choices for retirement saving as well. For one thing, unused account funds can be rolled over year after year, and money you deposit into your HSA can be invested in a variety of mutual funds, similarly to a 401(k).

Contributions up to an annual maximum of $3,350 for 2016 (plus an extra $1,000 if over 55) are tax-deductible, and invested funds grow on a tax-deferred basis. In addition to this, you also get the bonus tax benefit of tax-free withdrawals when the money is used for qualified healthcare expenses. In other words, you get a tax break now and withdrawals aren't taxable income as long as they're used for healthcare. This is like getting the benefits of both a traditional and Roth IRA in one account.

Once you're over 65, you can withdraw from your HSA for any reason without penalty, however the money will be considered taxable income if not used for healthcare expenses.

To open and contribute to an HSA, you'll need to meet a few qualifications, such as being enrolled in a high-deductible health plan. I can't stress enough how HSAs are an excellent way to prepare for healthcare expenses in retirement (or before), so here's an in-depth look to give you more information.

The bottom line

Of course, there are some other things you can do to prepare. For example, by taking better care of your health now, you could reduce your future healthcare costs. One University of Michigan study found that people in good health spend about 20% less on healthcare than those in poor health. Based on the figures in the expense chart, it's easy to see that the savings can be substantial.

Or, you could look into long-term care insurance so you and your spouse aren't stuck with massive bills if one or both of you ends up needing this type of care.

The bottom line is that healthcare costs in retirement are a huge expense, so it's smart to prepare for them, and to do so as soon as possible.