How Much Retirees Spend on Out of Pocket Medical Costs - SmartAsset

One risk that retirees face is the uncertainty that surrounds their out-of-pocket health costs, over and above their predictable insurance premiums. A new analysis finds that households of 65-year-olds or older, on average, would pay an estimated $67,000 in out-of-pocket healthcare-related charges over the course of their retirement. This can be a lot for anyone, but especially those who have limited income and who see their health becoming more of a concern over time.

You can work with a financial advisor to properly plan for retirement and take into account any potential out-of-pocket medical costs so that you’re ready for anything retirement brings you.

Amount Retirees Spend on Healthcare

The study, recently published by the highly respected Center for Retirement Research at Boston College, finds that the median out-of-pocket costs that hit a retiree paid during 2018 totaled $4,311, an amount that eats up 25% of their annual Social Security payments. For some retirees, the hit was much smaller, but for others, the burden of medical costs consumed nearly 90% of their benefit checks.

For women, the hit to their Social Security income was bigger than for men, because of their lower payment amounts.

“Even though nearly all retirees over age 65 are covered by Medicare, they still face considerable costs,” the study’s authors wrote. Examining the share of Social Security benefits consumed by out-of-pocket medical costs, they added, “is important, because it is crucial to know how much the large share of retirees who rely exclusively on Social Security have remaining for non-medical spending.”

Social Security Income and Medical Costs

As of July 2022, the average monthly Social Security payment was $1,625. Without those benefits, about 4 in 10 adults aged 65 and older would be living below the poverty line, according to the Center on Budget and Policy Priorities, adding that Social Security provides about 1 in 4 older adults with at least 90 percent of their income. The average income for retired Americans 65 and older in 2020 was $46,360, or $3,863 per month.

Dividing the study sample into segments ranked by their out-of-pocket payments paid during 2018, the researchers found:

25% of retirees paid $2,598 or less
26% to 50% of retirees paid between $2,598 and $4,311
The top 25% of retirees paid $6,403 or more
The top 5% of retirees paid $10,947 or more

For most retirees, healthcare insurance premiums made up the majority of their payments but, for the 5% of retirees paying the highest medical costs, other medical charges were nearly as much as their premiums.

As a portion of their Social Security benefits, out-of-pocket medical costs ate up nearly two-thirds of the Social Security income for 10% of retirees:

25% of retirees spent just 16% of their Social Security checks on out-of-pocket medical charges
Half of all retirees spent 25% of their benefit income or less
10% of retirees spent 65% of their benefits or more
5% of retirees spent 89% of their Social Security income or more

The importance of out-of-pocket charges was highlighted earlier this year when the premium for Medicare’s Part B coverage jumped by 14.5% for 2022, while the annual cost of living adjustment for Social Security increased benefit payments by 5.9%. Approximately 20 million U.S. residents receive Social Security retirement benefits.

The Bottom Line

The study’s author concluded that with out-of-pocket health costs, “eating away at retirement income, and Part B premiums on the rise, it is understandable why many retirees likely feel that making ends meet is difficult.” These medical costs may not be going away anytime soon so it’s more important than ever to make sure that they are factored into your retirement planning.

Tips for Retirement

You can prepare for retirement on your own but there is a lot to consider, especially when you take into account that so many people have been blindsided by these increasing medical costs. You can also work with a financial advisor who can properly plan to deal with any concerns you have about your impending retirement. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you’re trying to find the right balance in your retirement portfolio, consider using SmartAsset’s free asset allocation calculator to help you get the right mix that can help you hit your financial goals.