A recent paper published in the American Journal of Law and
Medicine investigates expenditures, risks, and perceptions of both. The authors
find that while many have pretty good at understanding basic costs, most are
very bad at understanding risk.
Let's take a look at the evidence.
The alphabet soup
of medical coverage in retirement
There are a lot of options for retirees. Medicare, Medicaid, supplementary
coverage through private insurance companies or an employer -- the list is
complex and seemingly endless.
Sifting through these options is one thing; figuring out how
much it's all going to cost at the end of the day, between premiums,
deductibles, and other expenses, is quite another.
So how much is health care in retirement going to cost you?
The answer depends on your health, on your lifespan, and on
your willingness and ability to pay. Outside of the personal questions, it also
depends on things completely beyond your control, like overall medical costs
and government policies.
However, much research time has been devoted to the subject
of how much you're likely to spend. One study, which attempts to project
expenses out into the future finds a disturbing inflationary trend: healthcare
costs are pretty high, and rising.
The authors of this paper found that people were actually
pretty good at estimating the component costs of coverage and what they would
need, more or less, to meet them. Good news, right? Well, on the surface yes,
but there was one major problem.
"Some people
know costs; few know risks"
Unfortunately, having a sense of basic costs is actually of
little use when it comes to specific situations. What many people failed to
take into account in the survey, and what we probably collectively fail to take
into account in the real world, is the immense uncertainty we face when it
comes to our own health care expenses -- both as a matter of individual health
and as a matter of changes outside our control.
At the end of the day, you might spend far less on health
care than the average retiree ... or you might spend far more. To give you an
example, let's a look at the extended version of the annual expenditures chart
above for the years 2010 and 2040.
You can see that costs in 2040 are projected to be about
140% of costs today for all spending levels. But did you notice the extreme
variation in those levels within the same year? For both, there is a difference
of about 200% between spending at the 25th percentile and spending at the
90th.
That difference amounts to over $9,000 per year in
2040.
The enormous cost of
uncertainty
These results illustrate how much costs can vary from one
person to another. Couple the table with some choice statistics about Medicare and
you begin to appreciate that costs can skyrocket more than you might have
imagined.
Maybe we'll all get lucky, but we simply don't know what's
going to happen over a 30 year retirement, whether it's an accident, sudden
illness, or just severely declining health. Instead of thinking we're just
about average (or excellent) in terms of health, we need to plan for those
worse-case scenarios. The costs of not doing so could be steep.
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