Common retirement planning practice uses estimates for out-of-pocket health care costs that are fixed over time. The paper acknowledges that this approach provides a reasonable input for gauging the success rate of a retirement portfolio. At the same time, that average figure obscures the challenges that fluctuations in out-of-pocket health care costs can pose to a retiree using a fixed spending strategy.
Starting with the same parameters for the hypothetical example mentioned above, the estimated health care costs in retirement for a healthy 65-year-old woman would be calculated at an annual fixed amount of $3,000. Research described in the paper, however, estimates that her out-of-pocket health care costs could range from $1,605 to $18,046 in a given year. There’s a chance she could spend a little less than the fixed annual average of $3,000, but she could also end up having to spend as much as $15,000 more than that—a sizable chunk of her annual spending target that would require her to cut spending significantly in other areas to compensate.
This exercise underscores the need to factor into retirement planning the reality that health care costs might average a certain amount over the long haul but will vary significantly from year to year.