By Tyler Olson @

Americans tend to work hard their entire lives, saving pennies and dimes wherever they can to build a retirement nest egg. When they finally do retire, Americans are generally frugal, with retired couples having just an 80% spending-to-income ratio on average, according to research just released from the Employee Benefit Research Institute (EBRI).

Where things go bad for retirees though, is usually when healthcare costs rise. According to Rebecca Moore at PLANSPONSOR:

EBRI found housing expenses were by far the largest item in all groups’ budgets. For the average single retired household, housing-related expenses accounted for 48% of total expenditures. In contrast, their couple counterparts allocated 7 percentage points less of their total spending to housing in 2015. Retired households spent slightly more on health care compared with the households of those in the labor force.

It has been shown empirically, and not surprisingly, that health expenses grow steadily with a person’s age. For example, EBRI’s research shows that, in 2011, households with at least one member between ages 50 and 64 spent 8% of their total budget on health items, compared with 19% for those 85 or older. In addition, the share of total spending used for out-of-pocket health expenses was second largest for those 75 and older.

The probability of having a budget deficit in retirement has a positive correlation with catastrophic medical expenses. Those who spent 20% or more of their income on medical expenses, 85% experienced a budget deficit, while of those who spent 5% or less, only 20% experienced a deficit.

EBRI cites the income replacement approach typically used to help determine whether a person is on track for adequate retirement savings: To maintain financial well-being in retirement, one’s income should be 70% to 80% of his final-year salary. This approach assumes that households will need less income in retirement than during the employment period, as costs for transportation, housing, and even food, plus other work-related expenses, might be reduced. Its findings support that reduction in housing and transportation expenses for retirees relative to those in the labor force. However, food costs and health expenses are higher for retirees.

You need to consider savings for health care costs. I wrote in 2014 that: “Fidelity has estimated that a 65-year old couple retiring in 2014 will need $220,000 to cover their healthcare expenses through retirement. It’s no surprise if you’ve paid attention to the fast increasing costs of medical care. Since 1997, costs for nursing homes have nearly doubled. And costs of hospital services are on their way to tripling.”

If you haven’t considered the cost of your retirement healthcare in your investment plan, no is the time to start making adjustments. If you don’t, you could end up being one of the retirees who is forced to keep working.

Originally posted on Your Survival Guy