Estimate healthcare costs in retirement: your first-year cost, lifetime total and savings needed, using typical inflation and return values you can change.
Retirement Healthcare Cost Formula
Healthcare costs are projected to retirement with healthcare inflation, then valued as a growing stream during retirement.
Cost in the first retirement year:
Savings needed at retirement:
Total future-dollar cost:
Variables:
- i is annual healthcare inflation
- r is annual return during retirement
- w is years until retirement
- n is retirement healthcare years
- P is the first-year retirement cost
Savings-needed mode reports present value at retirement for the selected annual payment timing. P is the first actual annual payment: at retirement for beginning-year timing, or one year later for end-year timing. Later payments grow by healthcare inflation. First-year-cost mode needs only ages, current cost and inflation.
The model assumes constant healthcare inflation and a constant net nominal investment return after fees, on the same future-dollar basis. Use a consistent individual or household cost estimate. Current age may equal retirement age. This is a scenario, not a prediction of health needs, coverage or market returns.
Long-term care and large one-time expenses should be modeled separately when they are not included in the annual estimate.
Healthcare Inflation Illustration
Growth of a $12,000 annual cost before retirement.
| Years | 3% inflation | 5% inflation | 7% inflation |
|---|---|---|---|
| 10 | $16,127 | $19,547 | $23,606 |
| 15 | $18,696 | $24,947 | $33,108 |
| 20 | $21,673 | $31,840 | $46,436 |
Example Problems
Example 1: Project first-year cost.
A $12,000 annual cost growing at 5 percent for 15 years becomes about $24,947 at retirement.
Example 2: Estimate retirement savings.
Discount 25 growing annual costs at the expected retirement return to estimate the amount needed at age 65.
Frequently Asked Questions
Should Medicare premiums be included?
Include expected premiums and out-of-pocket costs not paid from another dedicated source.
Why can savings exceed nominal cost in unusual cases?
It generally should not with nonnegative returns, but very low or negative returns increase present-value needs.
Does this include long-term care?
Only when the annual estimate and growth assumptions deliberately include it. Medicare generally does not cover custodial long-term care; budget separately for expenses omitted from the annual scenario.
