The conventional wisdom on health care in retirement is that clients with more expensive health care needs must save more. However, a new paper from the Empower Institute shows that if those health conditions shorten clients’ lives, even though their average annual expenses are higher, their overall savings goal might actually be lower than a healthy person’s.

Written by W. Van Harlow, director of research for the Institute, the paper shows that a healthy 65-year-old male needs to save approximately $144,000 to fund health care expenses in retirement, including Medicare premiums and out-of-pocket expenses, with a 90% confidence level. Women need to save about $156,000.

However, if you factor in common health problems like cancer, diabetes or heart disease, and smoking, the higher cost of care is offset by fewer years spent paying for that care.

“Nearly everyone who is anywhere near retirement age worries about whether he or she has saved enough to cover health care costs once he or she retires. Unfortunately, these worries are well-grounded,” Harlow wrote.

A survey conducted by Empower Institute and Brightwork Partners found only 12% of workers have factored health care costs into their retirement plan, and 80% of boomer respondents listed uncovered health care expenses and the risk of getting sick as their top two financial concerns.

Furthermore, more than half of respondents said they don’t know how much Medicare will cost them (in fact, a 2012 Center for a Secure Retirement report found 13% of Americans think Medicare is free). “Even though health costs poll as one of the greatest concerns among Americans in or close to retirement, the retirement services industry has made minimal progress toward addressing these concerns,” Harlow wrote.  

As people get older, they get sicker, the survey found. The incidence of high blood pressure and high cholesterol increase dramatically for people in their 50s, until about half of respondents in the pre-retirement group (those between 60 and 65) reported having those conditions.

Diabetes, cancer and cardiovascular disease also increased with age but were less common with respective incidence rates of 12.5%, 8% and 7.1%. Tobacco use, evidently a national pastime, was relatively stable across all age groups at 25%. About 20% of people in the pre-retirement group were in good health.

The study broke down the costs of each disease, including Medicare and out-of-pocket costs for the first year of retirement. A healthy 65-year-old woman making $85,000 or less (and thus paying no income surcharge for Part D prescription coverage) could expect to pay approximately $450 a month. Diabetes and heart disease push the monthly cost over $500, and cancer increases costs to more than $600 a month.

Men had slightly smaller expected costs across the board. Cancer had the biggest impact on monthly costs, increasing health care expenses from about $425 for a healthy 65-year-old man to just under $600.

Retirees in the top income tier, those who make over $214,000 a year, can expect to pay about $700 to $870 a month, the survey found. “Keep in mind, of course, that these are only first-year costs. Health care inflation, which historically has outpaced general inflation, could quickly make these costs an ever-increasing burden on retirement savings,” Harlow wrote.

As for how long retirees may pay these expenses, a healthy 65-year-old man is expected to live to age 87, according to the report. Heart disease, high blood pressure and high cholesterol cut one or two years off, while cancer and tobacco use both reduce life expectancy to 81. Diabetes had the biggest impact, reducing a 65-year-old man’s life expectancy to just 78.

For women, the life expectancy for a healthy 65-year-old is 89. As was the case for men, heart disease, high blood pressure and high cholesterol cut that by between one and two years. The life expectancy for a tobacco user was 83, while cancer and diabetes dropped it to 81.

The report found a healthy 65-year-old man needs about $143,800 to fund health care at a 90% confidence rate. Cardiovascular disease and high blood pressure increased the savings burden by 2.6% and 1.1%, respectively.

The mortality rate among men with diabetes had the biggest impact on savings, reducing the amount required by more than 38%. Tobacco use lowered the amount required by more than 20%. Cancer and high cholesterol had smaller impacts, reducing the savings burden by 5.8% and 9.3% respectively.

“The shorter life expectancies for conditions such as cancer, diabetes, high cholesterol and tobacco use more than offset the higher annual costs. In other words, while individuals with these conditions have higher annual health care expenses, they don’t have to pay them as long,” Harlow wrote.

It can be overwhelming, not to mention depressing, for clients to try to put an expiration date on their retirement needs, especially with so many variables. However, as Harlow pointed out, “the impossibility of precision is no excuse for inertia. Doing nothing to address retiree health costs is not an option.”

Harlow charged the retirement services industry to be more proactive in helping retirees estimate their health care costs in retirement. While there’s no one-size-fits-all solution, workplace savings plans could incorporate tools to help individuals with retirement health care planning.

“The key drivers of such an assessment process should include well-established actuarial data associated with a few most dominant health variables, including state of residence; publicly available estimates on Medicare costs and how they break down; and, finally, real assurances to participants that any data they enter will be strictly confidential,” Harlow wrote.

— Read How Health Care Will Crush the 80% Income Replacement Idea in Retirement on ThinkAdvisor.