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How Much Are Seniors Spending on Medical Expenses?

Kimberley Fowler
By Kimberley FowlerApril 24, 2017

When saving for retirement or trying to create a budget for yourself or your senior parents, planning for medical expenses can be a guess at best. Unfortunately, misjudging the costs of medical expenses can easily derail retirement plans and drain savings. Therefore, budgeting accurately is critical. 

So, how much are seniors actually spending on medical expenses each year and what’s a realistic amount to set aside?

Study Estimates Costs of Senior Medical Expenses

The truth is there’s no magic number to save for your medical expenses. What seniors 65 and over will spend on health care each year will differ depending on age, gender and health status, so the frustrating reality is that working with an industry average could leave you very short. That’s why the findings of Medical Spending of the U.S. Elderly, a recent 2015 study, are so important.

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The study, led by economist Mariacristina De Nardi of the Federal Reserve Bank of Chicago, focused on discovering how much money goes to medical care for Americans aged 65 and older. The report, which is based on data collected between 1996 and 2010 through the Medicare Current Beneficiary Survey found that healthcare spending for people aged 65 and over was approximately $18,424 per person, per year, and nursing home costs accounted for a large proportion of out-of-pocket and Medicaid expenses.

But does this mean that seniors 65 and over should have $18,000 per year set aside for medical expenses? The answer isn’t that simple because this per person average does not only include out-of-pocket expenses for seniors.

Who is Paying for What?

When it comes to covering medical expenses, seniors in the United States have some options, including:

  • Medicare
  • Medicaid
  • Private insurance

There are also “copayments for services covered by Medicare which are either paid by a supplemental private ‘Medigap’ insurance plan or out-of-pocket by the beneficiary,” the study found.

Ultimately, it turns out that the government pays for almost two-thirds (or 68%) of health care spending by the elderly, with Medicare accounting for 55% of the coverage, Medicaid covering 10% and other government programs covering the remaining 3%. Private insurance covered approximately 13% of the elderly’s medical expenses.

This means that seniors are left to cover the rest. Specifically, “20% of medical spending of the elderly is financed by out-of-pocket expenses,” the report found.

So, if the average annual medical expense per person is $18,424, then can we assume that saving 20% of this per year, (or $3,684.80) would be enough? Not necessarily.

Medical Costs Increase as You Age

The researchers found that medical spending doubles between the ages of 70 — 90, and that the average amount spent on medical expenses for an American in his or her 90’s exceeds 25,000 per year. Again, nursing home expenses comprise a large chunk of the costs.

Think that’s a lot? The study found that medical spending over the last year of an American’s life averaged $59,100, with 71% of this amount paid for by Medicare, and 10% paid for by Medicaid, again leaving seniors and their families to carry the burden of the outstanding 20%.

Out-of-Pocket Expenses are High

The study authors suggest that “even with public and private insurance, out-of-pocket medical expenses are significant.”

So, when it comes to saving for retirement or working medical expenses into your budget, you need to consider your coverage and your age. For the average American senior 65 years or older, it would be smart to save about 20% of the total expected medical expenses as anticipated out-of-pocket expenses, but keep in mind that these expenses increase significantly as you age, and rise even more in the last year of your life.

Ultimately, when it comes to budgeting for medical expenses all you can do is make a guess, but at least when you consider the results of the Medical Spending of the U.S. Elderly study, this guess can be an educated one.

Approximately how much do you spend on out-of-pocket medical expenses each year? We’d love to hear from you.

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Leatherby, Lauren. Medical Spending Among the U.S. Elderly. Journalists Resource. February 22, 2016. Available online: https://journalistsresource.org/studies/government/health-care/elderly-medical-spending-medicare

De Nardi, Mariacristina; French, Eric; Jones, John Bailey; McCauley, Jeremy. “Medical Spending of the U.S. Elderly,” National Bureau of Economic Research Working Paper No. 21270, 2015. doi: 10.3386/w21270. Available online: http://www.nber.org/aginghealth/2015no2/w21270.html

Kimberley Fowler
Kimberley Fowler
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