Imagine that you are 65 years old and tomorrow is your retirement party. After some cake and maybe a roast, you'll step across the office threshold one last time and into the next phase of your life.

Did you save an extra $300,000 for health-care expenses? That's how much you and your 65-year-old spouse could expect to spend by the time you reach your average life expectancy, assuming you have access to health benefits from your former employer and pay the full premium yourselves. (1) If you live to age 95 – an increasingly common occurrence – you might need $550,000 to cover insurance premiums and out-of-pocket expenses. (2) If you planned to rely on Medicare for health coverage instead, you could need even more.

Much emphasis is placed on saving enough money for a comfortable retirement income. But unless you factor in the potential cost of health care, you could arrive at retirement's door a little short of what you'll need.

Not Like the Others

U.S. consumers are used to seeing innovative products become cheaper over time, with the classic example being the handheld calculator. A pricey luxury when it first hit the market in the 1970s, the calculator has become so inexpensive that it is sometimes considered a throwaway item. Other innovative products have followed this trend toward lower costs over time, including digital watches, TVs, VCRs, DVD players, home computers, and cell phones.

Not so with medical care, which gets better all the time, but not cheaper. In 1950, medical costs consumed only about 4% of consumer spending, compared with the 40% consumed by food and clothing. (3) In 2006, medical costs accounted for about 16.5% of consumer spending, compared with 17% for food and clothing. And there is little indication that this trend will reverse any time soon. (4)

Health care could turn out to be one of your largest expenditures in retirement. If you have not already accounted for medical costs in your retirement needs projection, now may be the time to make an adjustment.

1–2) Employee Benefit Research Institute, 2006
3) Investor's Business Daily, January 25, 2005
4) Bureau of Economic Analysis, 2006

Health Cares