Figuring out how much money you need to retire is complicated, especially since you have to plan for spending on things many decades into the future. And a study shows that far too many Americans are making a big mistake when they do their calculations: They aren't figuring out what they'll likely need for medical care.
And since healthcare costs are one of the biggest expense retirees tend to face, this oversight could be devastating to their financial security.
Most Americans are in for a shock on healthcare costs
According to a study published last April by the Employee Benefit Research Institute, less than a third of all Americans have tried to determine how much they'll need for healthcare during retirement.
This is a big problem, as recent research suggests out-of-pocket spending on healthcare -- including Medicare premiums, deductibles, and co-insurance costs -- would be around $285,000 for a senior couple retiring in 2019.
If you've set a retirement savings goal and haven't factored in this huge potential expense, there's a very good chance whatever you've saved for retirement simply won't be enough.
That's especially true because these estimates don't take into account the money you may need for a nursing home or home care if you or your spouse can no longer live independently. Medicare doesn't typically provide any coverage for long-term care, so a move to a nursing care facility or getting in-home help could leave you on the hook for thousands of dollars in monthly bills.
How to prepare for healthcare expenses
While it's not fun, you absolutely must try to determine an amount you should save for healthcare as a retiree.
Expert estimates can be a good starting point, as can data from the Bureau of Labor Statistics, which shows mean annual spending on healthcare among seniors in 2018 was $6,802 for those 65 and over, and $6,930 for people 75 and up.
Since healthcare costs are expected to go up by about 5.5% annually over the next decade, you can work with today's estimates and adjust them upward to account for inflation if you're still a long way from retirement.
Once you know what your estimated spending will be, figure out how much you need to save just to cover your healthcare expenditures. If you expect you'll need about $15,000 per year on average for medical care and anticipate withdrawing 4% from your retirement savings accounts annually, you'd need $375,000 saved just for healthcare. And that's not including long-term care.
To prepare, you may want to increase 401(k) contributions or begin investing in an IRA earmarked to cover your medical needs. If you are eligible to contribute to a health savings account, this is the best option since you can make tax-deductible contributions and withdraw funds tax-free for medical care.
You may also want to look into buying long-term care insurance to cover nursing home or long-term care costs.
The younger you are when you begin planning for your future, the more likely it is you'll have enough money to pay for all the care you may need as you age.