How do I project lifetime healthcare costs in retirement?

Question

AcadiFi · Accepted Answer

Healthcare cost projection separates costs into five categories, each with different inflation dynamics:

(1) Medicare Part B premiums: 2026 standard premium $185/month, higher via IRMAA for incomes above $103k single / $206k joint. Part B inflation has averaged 5.5% annually.

(2) Medicare Part D (prescription): average $60/month, wide variation by drug needs.

(3) Medigap supplemental: Plan G $150-280/month depending on age and state, inflating 4-5% annually.

(4) Out-of-pocket and dental/vision/hearing: $1,800-3,500/year average, not covered by Medicare.

(5) Long-term care: separate category, covered above.

Projection for Octavian, retiring age 66 in 2026, expected longevity to 88:

Year 1: Part B $2,220 + Part D $720 + Medigap $2,400 + OOP $2,800 = $8,140/year.
Cumulative 22-year PV using 5% healthcare inflation and 3% discount: $195k per person. For a couple, $390k total, not counting LTC or IRMAA surcharges.

Fidelity's annual Retiree Health Care Cost Estimate for 2025 came to $165,000 per person, consistent with this bottom-up calculation. Employee Benefit Research Institute (EBRI) estimates range $150k-$400k depending on Medigap level and drug usage.

Strategies to manage:

(a) HSA maximization pre-retirement: triple tax advantage for future medical spending. Maximum $4,300 single / $8,550 family 2025.

(b) Roth conversions to reduce future MAGI and IRMAA.

(c) Delay Medicare enrollment if still working with group coverage (no penalty if >20 employees).

(d) Geographic arbitrage: Medigap varies by state; retiring to low-cost healthcare states saves $500-1,500/year.

For CFA Level III, project these costs separately from general retirement spending because healthcare inflation exceeds CPI materially and affects withdrawal sequencing.

How do I project lifetime healthcare costs in retirement?

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