Healthcare Cost Forecasting for Retirement Budgets

Planning for retirement income without a realistic healthcare forecast is one of the most common causes of shortfalls I see in client plans. Healthcare cost forecasting turns uncertain future medical expenses into actionable numbers you can plan around — not exact predictions, but defensible scenarios that inform savings, insurance choices, and retirement spending strategies.

Why forecasting healthcare costs matters

• Healthcare costs are a major variable in retirement and can be volatile year-to-year. Medicare and private insurance reduce some risk but leave gaps (dental, vision, long‑term care, premiums, deductibles, and copays).
• Studies and industry projections show health spending often outpaces general inflation. For example, Fidelity’s Health Care Cost studies provide long‑range estimates that many planners use as a baseline (Fidelity Investments, 2021). Federal health expenditure projections from the Centers for Medicare & Medicaid Services (CMS) indicate continued growth in health spending beyond overall inflation (CMS, 2024).
• Without a forecast, people tend to underfund healthcare needs or over-rely on assumptions that Medicare covers “everything.” In my practice, a clear forecast has shifted clients’ savings behavior, insurance choices, and retirement timing more than any single investment assumption.

Key inputs for a robust forecast

A defensible healthcare forecast blends personal data with public benchmarks. Core inputs include:

1. Current annual health spending (out‑of‑pocket plus premiums)
2. Expected retirement age and life expectancy (use SSA tables or actuarial estimates)
3. Inflation assumptions specific to healthcare (healthcare inflation often differs from CPI)
4. Known health conditions and likely future procedures or medications
5. Insurance coverage details: Medicare parts A/B/D/Medicare Advantage, Medigap, employer retiree coverage
6. Long‑term care risk and likely setting (home care, assisted living, nursing home)
7. Available tax-advantaged balances (HSAs) and how you plan to use them

Sources I use routinely: Fidelity’s health cost studies for baseline totals, CMS National Health Expenditure projections for inflation trends, and Social Security actuarial life tables for longevity assumptions (Fidelity Investments; CMS.gov; ssa.gov).

Step-by-step forecasting method (practical)

1. Establish a baseline year: combine current premiums, average out‑of‑pocket medical spending, and expected Medicare/Medicaid premiums at retirement age.
2. Project annual healthcare inflation: for many households I assume 4–6% for a conservative forecast; adjust this based on CMS projections and your provider network cost trends.
3. Model longevity: run projections to age 85 and 95 to see a range of total lifetime costs.
4. Add scenario layers: a base case (no major chronic events), a moderate case (one chronic event), and a high case (long‑term care or multiple chronic events).
5. Include timing for big one‑time expenses (knee/hip replacement, cataract surgery, major dental work).
6. Calculate present value if needed to estimate a lump sum needed at retirement.

Example — simplified single-person forecast

• Current annual out‑of‑pocket + premiums at retirement: $8,000
• Assumed healthcare inflation: 5% annually
• Years in retirement (age 65 to 90): 25 years

Using a simple escalation (no discounting), Year 1 = $8,000; Year 25 ≈ $8,000 × 1.05^24 ≈ $25,600. Summing a 25‑year series yields roughly $380,000 in nominal dollars. If you discount future costs to present value at a 3% real rate, the lump sum needed is lower. The point: small changes to inflation, longevity, or a single catastrophic event shift totals materially.

Scenario analysis and sensitivity testing

Good forecasts aren’t single numbers — they show ranges. Run sensitivity tests on:

• Healthcare inflation (±1–2%)
• Life expectancy (±5–10 years)
• Probability and costs of long‑term care
• Changes in insurance premiums (especially Medicare Part B and Part D premium trends and IRMAA impacts for high incomes)

Monte Carlo or scenario runs help show the probability your savings will cover health costs at given confidence levels. For many clients, I recommend planning for a 90th percentile scenario for healthcare if they are uncomfortable with risk.

How Medicare and other coverage fit into forecasts

Medicare reduces but does not eliminate risk. Important points to model:

• Medicare does not cover most long‑term custodial care (nursing home, long‑term assisted living). See our guide on Healthcare Planning in Retirement: Medicare, Medigap, and Long‑Term Care for details on coverage gaps and supplemental options.
• Timing of Medicare enrollment affects premiums and penalties. Missed enrollment periods can create costly late‑enrollment penalties.
• Premiums for Medicare Part B and D can increase, and higher income retirees may face IRMAA surcharges. Consider how Roth conversions or taxable withdrawals might interact with Medicare premiums — our article on Strategic Use of HSAs and Medicare Coordination discusses coordination strategies.
• For those retiring before 65, plan transitional coverage or bridge strategies; see our resource on Planning Medicare‑Age Health Expenses Before and After 65.

Long‑term care: treat separately

Long‑term care (LTC) is a major cost driver but follows different actuarial patterns. LTC should usually be modeled separately from annual health expenses because:

• LTC is event‑driven and has a low probability but high cost.
• Costs vary by setting and geography.
• Options include self‑funding, LTC insurance, hybrid life/LTC policies, or Medicaid planning for low‑asset households.

When possible, model LTC as a conditional event (e.g., 20% chance of a 3‑year nursing home stay) and include the expected cost in your high‑case scenario.

Tools, data sources, and calculators

• Fidelity Health Care Cost studies (baseline lifetime estimates for benchmarking)
• CMS National Health Expenditure projections for healthcare inflation and system‑level trends (cms.gov)
• Social Security actuarial life tables for longevity assumptions (ssa.gov)
• Professional planning software (HealthView Services, MoneyGuidePro, NaviPlan) that support scenario runs
• Spreadsheets for custom, transparent models (I provide clients with a simple Excel template that shows year‑by‑year costs and scenario toggles)

Common mistakes and how to avoid them

• Assuming Medicare covers everything — it does not (dental, vision, hearing, most long‑term custodial care).
• Underestimating healthcare inflation — use healthcare‑specific inflation, not general CPI.
• Ignoring IRMAA and tax interactions — income in retirement can drive higher Medicare premiums.
• Treating LTC as an annual expense instead of an event‑driven risk.

Practical tips for lowering risk and cost

• Maximize tax‑advantaged savings: contribute to HSAs while eligible (pre‑Medicare); use them to pay qualified medical costs tax‑free in retirement.
• Buy appropriate Medicare supplements or Medigap if you want predictability in out‑of‑pocket costs.
• Maintain a dedicated healthcare reserve or a conservative withdrawal bucket specifically for medical expenses.
• Consider partial long‑term care insurance or hybrid products if family history or financial exposure makes LTC likely.
• Revisit your forecast annually — medical costs, coverage rules, and your health change.

Checklist to build your forecast

• Gather 2–3 years of medical spending and premium history
• Review all expected benefits at retirement (employer retiree coverage, Medicare options)
• Choose healthcare inflation and longevity assumptions
• Build base/moderate/high scenarios and calculate total nominal and present‑value needs
• Identify funding sources (HSAs, dedicated accounts, investment portfolio)
• Revisit annually or after major health/financial changes

FAQs (short)

• How much should I budget per year for healthcare in retirement? It depends on current spending, coverage, and location. Benchmarks range widely — many planners use $7,000–$15,000 per person annually as a starting point before escalating for inflation and longevity, but customize this to your situation.
• Is long‑term care included? Not usually; plan LTC separately unless you explicitly add it to the forecast.
• Can I rely on Medicare? No — Medicare helps but leaves materials gaps and out‑of‑pocket risks.

Final steps and next actions

1. Assemble your current medical spending data and insurance summaries.
2. Select conservative healthcare inflations (4–6%) and run 2–3 scenarios to see a range of outcomes.
3. Decide which gaps you’ll insure (Medigap, LTC) and what you’ll self‑fund.
4. Build a dedicated healthcare reserve and update the forecast yearly.

Professional disclaimer

This article is educational and does not constitute individualized financial, tax, or medical advice. For tailored forecasting and product recommendations, consult a certified financial planner, licensed insurance agent, or tax professional who can evaluate your full financial picture.

Sources and further reading

• Fidelity Investments, Health Care Cost Study (2021). Use as a benchmark for typical lifetime healthcare costs. https://www.fidelity.com
• Centers for Medicare & Medicaid Services, National Health Expenditure Projections (2024). https://www.cms.gov
• Social Security Administration, Actuarial Life Tables. https://www.ssa.gov

(Links to FinHelp resources referenced above: Healthcare planning guides on Medicare and HSAs.)