Healthcare expenses are receiving increasing attention from retirees (and the media) today and many financial planners are starting to think about how to potentially incorporate these expenses into a financial plan. This article explores some of the key considerations associated with modeling healthcare-related expenses for retirees with a focus on the impact of these expenses on future retiree spending (and consumption) using data from the Health and Retirement Study. We find that households that experience unexpected out-of-pocket healthcare expenses tend to decrease spending by more than those who do not. For example, if healthcare expenses in a given year exceed 10 of total spending (excluding health insurance premiums, which we define as a health shock), then future total spending, nondurable spending, and consumption drop by approximately 5 more than households that do not experience the shock. Financial advisors (and households) interested in including healthcare expenses as part of a financial plan should be aware of this effect since it can potentially reduce the actual financial implications associated with a retiree health shock (or other retiree healthcare expenditures).
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