Costs of Living for Retirees

Rising Medical Costs Rip Into Retirees’ Savings

First, the good news: Retirees now live longer. But they also have to pay for it. Staying healthy and sharp may cost the average retiree a huge chunk, if not all, of their retirement savings.

For many, health care costs represent the great unknown. Retirees often overlook the real budget buster to their portfolios—the rising costs of healthcare basics like prescription drugs, tests, and emerging medical treatments.

A report recently released by the American Association of Retired Persons (AARP) discovered that prescription drug prices rose 26 percent in the last two years alone, nearly double the rate of inflation. This is troublesome math for those who must factor in prescription drug costs on a monthly basis. The pharmaceutical industry disputes AARP’s findings, pointing out that the report fails to consider the steep drop in prices for drugs losing patent protection. But the report focused on the most popular drugs used by retirees, like Flomax, Aricept, and Advair—all of which saw their prices nearly double, according to AARP.
“Don’t even think that Medicare is going to cover everything,” said Paul Fronstin, researcher for the Employee Benefit Research Institute (EBRI) in Washington, D.C. “Regardless of how much [retirees] spend on healthcare, prescription drugs will forever put a dent into their budget.”

Even if prescription drug prices remain constant, the expense alone will continue to cut into retirees’ budgets simply because they use them more often. The report found that 110 million Americans have at least one chronic illness. Sixty million complain of having two, and 20 million suffer from a staggering five or more chronic illnesses. How much will it cost you to manage illness? No one has even begun to imagine these future costs associated with healthcare.

Studies by Fidelity Investments found that a 65-year-old couple with Medicare coverage will need an additional $230,000 just to cover their medical expenses in retirement this year; not even taking into account the costs of long-term care. Numbers from EBRI show that for a couple reaching their 65th birthdays in 2018, their out-of-pocket expenses will be a staggering $511,000 to keep them healthy.

“Those numbers do not even address the costs of catastrophic illness—the wildcard that so many of us fixate on and many retirement plans need to take into account,” said Sunit Patel, co-author of the Fidelity study. “Even if costs were to remain constant, retirees’ nest eggs would still be eaten up simply because they are living longer.”

Finally, retirees assume that Medicare will continue covering the majority of their medical expenses. But over time out-of-pocket costs will continue to rise for Medicare’s beneficiaries. Modern medicine promises long lives for those in retirement. But it is becoming painfully obvious that “retirement planning” will have to give way to “longevity planning.”