Morningstar - Summer 2019 - 56

Strategies

How Health Shocks Affect
Retirement Spending
Most retirees seem able to weather
an expensive medical bill.
What Harry Markowitz Doesn't Like
About the CAPM

David Blanchett

healthcare and the significant costs associated
with a health shock.

Retirement

Rising healthcare expenses are receiving
increasing attention from retirees (and the media),
and many financial planners are thinking about
how to incorporate these expenses into a
financial plan. A related concern is health shocks,
or out-of-pocket medical bills that claim 10% or
more of a year's retirement budget. Because these
events are-by definition-expensive and
surprising, it's reasonable to assume that they
might damage a retiree's financial position.
However, these events might require less planning
and saving than we might think.

Estimates of healthcare expenses are frequently
cited in the media, such as Fidelity's 2018
estimate that a couple retiring today at age 65
would need $280,000 for medical expenses,
excluding long-term care. Other estimates vary.
Fronstin and VanDerhei (2017), for example,
suggest median costs of $169,000 for a couple
(versus $226,000 at the 75th percentile and
$273,000 at the 90th percentile). HealthView 3
forecasts total health premiums, deductibles, etc.,
for a 65-year-old couple could be closer
to $404,253. Regardless of the details, the sums
are significant.

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RESEARCH

In a study, we found that health shocks are rarely
financially cataclysmic and that retirees tend
to respond to them by reducing future spending.1
Whether that's by choice or necessity, we
don't know. In any case, the result is that, on
average, lower ongoing spending at least partially
offsets the costs of a health shock. We'll
explore spending in retirement to help put this
new research into context, then dig into some
of the new findings.
Retiree Health Expenses
While outliving retirement savings is often noted
as the greatest fear among retirees,2 expenses
related to health are generally not far behind. Two
drivers of healthcare fears are increasing news
coverage about the total estimated costs of retiree

That said, it's important to put healthcare expenses
into context. These expenses are only part
of the total expenditures for households (and
retirees). One could just as easily create a
staggering estimate for the expected total costs of
food and housing, yet this type of information
rarely makes the news.
In EXHIB IT 1 , we provide some perspective on the
percentage of total retiree expenditures devoted
to healthcare. Panel A shows retiree expenditures
by percentile (the first percentile spends
the least, 100th spends the most). Panel B shows
expenditure by retiree income quintiles. The data is
from the Bureau of Labor Statistics' Consumer
Expenditure Survey 4 using the interview files from
the first quarter of 2012 to the first quarter of 2017.

1 The complete version of the analysis can be found in the main paper, titled "Health Shocks and Subsequent Retiree
Spending," published in the The Journal of Retirement, Summer 2018, Vol. 6, No. 1, PP. 55 - 69.
2 See research by Collinson (2016) and Allianz (2010).
3 HealthView Services: 2017 Retirement Health Care Costs Data Report. White Paper.
4 https://www.bls.gov/cex/

Morningstar Summer 2019

https://www.bls.gov/cex/

Morningstar - Summer 2019

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