Successful retirement planning requires a good understanding of what you want to do in retirement and a reasonable estimate of your expected expenses. Once you have a grasp of your likely retirement costs, you know approximately how much money you will need to salt away. However, one retirement expense is notoriously difficult to predict – healthcare expenses.
Fidelity recently estimated that an average healthy 65-year old couple retiring in 2017 will spend $275,000 on healthcare costs during their retirement, representing a 6% increase over last year's estimates. That estimate assumes no drastic changes in medical costs and insurance coverage – a less likely scenario given President Trump's executive actions to dismantle the Affordable Care Act and the growing momentum on the left for a "Medicare for All" single-payer system.
For the moment, let's assume that a single-payer system as proposed by Vermont Senator Bernie Sanders is in place by the time you retire. How would that affect your retirement costs and the savings you need to prepare for retirement?
Single-payer simply means that a single payer – in this case, the government – handles all payments for covered health expenses. That would replace the network of insurance companies and other entities that currently provide healthcare payments.
As proposed by Sen. Sanders, the single-payer system goes beyond the current Medicare program by expanding the types of coverage and eliminating most co-pays, premiums, and deductibles (a $200 annual deductible for prescription drugs would remain). The enormous cost, estimated at $32 trillion over 10 years by the Urban Institute, would require massive increases in taxes.
For reference, consider that the projected total revenue of the U.S. government for fiscal 2018 is $3.654 trillion. If Sen. Sanders' proposed single-payer system appeared overnight for 2018, it would likely consume almost the entire current U.S. income just to fund it.
Any single-payer system that the U.S. is likely to adopt will probably be a compromise from the Sanders plan, with fewer items covered and some higher amount of deductible or co-pay. Nevertheless, your costs as a retiree are still likely to be far less than the estimated annual $7,620 in medical costs that the average 2017 Medicare A and B recipient will pay (as estimated by The Motley Fool). Compared to the current market, it appears you'll need less money in retirement in a single-payer system.
The flip side is that your costs prior to retirement are likely to go up – way up. Regardless of who gets taxed directly, a portion of those taxes will trickle down to you as higher prices for the goods and services that you buy, lower wages through increased payroll taxes paid by your employer, and other pass-through mechanisms. Higher-income Americans can expect to pay considerably more as well.
You may need less to retire under a single-payer system, but you are probably going to have a harder time saving those funds. Under those circumstances, it's even more important to have a solid budget that allows you to apply a percentage of your income toward retirement. Keep spending and debt under control to give you extra breathing room to handle the increased tax burden while maintaining a retirement fund.
Employer-matching 401(k) programs may not survive such a move, but if they do, contribute up to the limit. It's effectively free money.
The next few years may be a turbulent time for healthcare, as our badly divided country attempts to attain a healthcare system that provides the best care at a sustainable cost. In the meantime, your best strategy for incorporating healthcare costs into your retirement is to fully fund your retirement accounts assuming the worst – and maintain a healthy lifestyle heading into retirement to decrease your dealings with the healthcare system.
Let the free Retirement Planner by MoneyTips help you calculate when you can retire without jeopardizing your lifestyle.