Fidelity^® Estimates Couples Retiring In 2012 Will Need $240,000 To Pay Medical Expenses Throughout Retirement

Households Relying on Social Security Benefits to Cover These Costs Should Expect Medical Bills to Consume 61 Percent of their Social Security Payments by 2027

BOSTON – A 65-year-old couple retiring in 2012 is estimated to need $240,000¹ to cover medical expenses throughout retirement, according to the latest retiree health care costs estimate calculated by Fidelity Investments.^® This represents a 4 percent increase from last year, when the estimate was $230,000.

Fidelity has calculated an annual estimate of medical expenses for retirees for more than a decade. For many Americans, health care is likely to be among their largest expenses in retirement. The estimate, which is calculated by Fidelity’s Benefits Consulting business, does not include any costs associated with nursing-home care and applies to retirees with traditional Medicare insurance coverage.

The estimate has increased an average of 6 percent annually since Fidelity’s initial calculation of $160,000 in 2002, with the exception of 2011 when the estimate declined $20,000. That one and only decrease in the history of the estimate was due to a one-time adjustment driven by Medicare changes that reduced out-of-pocket expenses for prescription drugs for many seniors. This year, health care expenses are rising once again².

“Today’s workers must understand that the cost of health care is expected to continue rising significantly in future years,” said Brad Kimler, executive vice president of Fidelity’s Benefits Consulting business.

“Medical inflation is outpacing salary increases and cost of living adjustments for many people. Until that situation changes, it is critical that individuals include health care costs in their retirement savings strategies today so they can be prepared to pay their medical bills throughout retirement,” Kimler said.

Retirees Relying on Social Security to Pay Health Costs Should Adjust Expectations
Many retirees rely on Social Security benefits as their primary source of income. For a 65-year-old couple retiring this year on a $75,000³ annual household income, annual Social Security payments will be about $29,970⁴.

Fidelity compared Social Security’s average cost of living adjustment (2.3 percent⁵) against an assumed average annual increase of health care costs for retirees nationally (6 percent)⁶. The comparison found that 65-year-old couples retiring this year with a $75,000 household income should expect that 35 percent of their annual benefit (about $10,476) could be needed for health care expenses today. In 15 years or by 2027, their allocation of Social Security benefits going to health care expenses is likely to almost double to 61 percent of a $41,205 annual Social Security payment, or about $25,000 a year⁷.

“Retirees relying entirely on Social Security to fund their health care costs will be faced with difficult challenges in the future,” said Kimler. “Today’s workers should plan to supplement their retirement income to cover their medical expenses. It is never too late to begin utilizing all retirement savings vehicles available, including any 401(k) accounts, IRAs and Health Savings Accounts, to help build a more secure retirement.”

Health Savings Accounts Are Efficient Vehicles to Save for Future Medical Expenses
In an effort to help ensure working Americans are prepared for retirement, many companies have adopted high-deductible health plans (HDHPs) which can be less expensive for participants and employers to use than traditional health plans. Participation in HDHPs qualifies users to establish Health Savings Accounts (HSAs) which allow individuals to pay for qualified medical expenses on a federal tax-free basis. The savings can be used to pay for current qualified medical expenses or participants can accumulate their savings and use the money to pay for qualified medical expenses in retirement. In addition, the accounts are portable for individuals who change employers. On an annual basis, Fidelity HSA® account holders contributed an average of $2,677 in 2011.⁸

Fidelity Encourages Employers to Adopt Culture of Health and Savings
In addition to offering savings vehicles such as HSAs, employers can help their workers manage health care expenses in retirement by encouraging a healthy lifestyle during their working years. A recent Fidelity employer survey⁹ found that while most employers (90 percent) believe there is some connection between personal health and financial wellness, less than half (46 percent) of the companies surveyed have an established culture of both health and savings in the workplace.

“It is important for employers to be committed to both health and wealth initiatives for their workers,” said Kimler. “A coordinated effort that integrates health benefits programs with retirement plans may be the best approach.”

Fidelity Offers Tools and Products to Help Workers Save for Health Care Costs
Individuals nearing retirement who want to increase their retirement savings beyond the maximum contribution limits of an HSA ($3,100), IRA ($5,000) or 401(k) ($17,000) could consider purchasing an annuity. Fidelity¹⁰ offers access to lower cost annuity products including Fidelity Personal Retirement Annuity¹¹, a deferred variable annuity that allows individuals to save with no IRS contribution limits on a tax-deferred basis. Retirees could consider using certain types of fixed annuities to cover their fixed expenses, including health care.

Workers with less than five years until retirement should assess their expected income needs and create a strategy to help ensure their savings will last. The Fidelity Income Strategy Evaluator is an income-planning tool that can help investors identify and test strategies to convert their savings to retirement income. Fidelity’s Retirement Income Planner is a tool that can help investors who are more than five years away from retirement create an income plan to help ensure they are saving enough funds to support them throughout retirement.

Methodology
As in years past, the Fidelity Retiree Health Care Costs Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government’s insurance program Medicare. The calculation takes into account cost sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care.

About Fidelity’s Benefits Consulting
Fidelity’s Benefits Consulting business helps employers nationwide assess the effectiveness of their benefits programs. The business provides a holistic approach to benefits design, strategy, funding, communications and delivery by looking at clients’ health care and retirement plans before diagnosing business solutions. The group’s specialties include retirement and health care plan consulting, custom data administration, compliance and employee communication. Benefits Consulting has offices in Boston, New York City, San Francisco, Chicago, Raleigh, Dallas and Merrimack, N.H.

About Fidelity Investments
Fidelity Investments is one of the world’s largest providers of financial services, with assets under administration of $3.7 trillion, including managed assets of $1.6 trillion, as of March 31, 2012. Founded in 1946, the firm is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing and many other financial products and services to more than 20 million individuals and institutions, as well as through 5,000 financial intermediary firms. For more information about Fidelity Investments, visit www.fidelity.com.

1) The estimate assumes no employer-provided retiree health care coverage and life expectancies of 17 years for men and 20 years for women.
2) The U.S. Supreme Court is expected to rule in June on the constitutionality of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act, both signed into law in 2010. Fidelity’s estimate today assumes that the health care reform laws will remain in place unchanged. If some of the laws’ provisions are removed, Fidelity’s estimate for retiree health care expenses could change.
3) According to the 2010 Current Population Survey conducted by the US Census Bureau, households headed by those aged 65 and older have an average income of $49,000. Fidelity based its calculation on a higher than average household income so its customer base would be represented better.
4) From Fidelity’s Benefits Consulting
5) From the Social Security Administration
6) From Fidelity’s Benefits Consulting
7) All data in this paragraph is from Fidelity’s Benefits Consulting
8) Fidelity data
9) Survey conducted via telephone by Boston Research Group from Nov. 16, 2011 to Dec. 12, 2011. It included 250 plan sponsors with 1,000 or more employees.
10) Before investing, consider the investment objectives, risks, charges and expenses of the annuity and its investment options. Call or write to Fidelity or visit Fidelity.com for a free prospectus and, if available, summary prospectus containing this information. Read it carefully.
11) Fidelity Personal Retirement Annuity (Policy Form No. DVA-2005, et al.) is issued by Fidelity Investments Life Insurance Company and, for New York residents, Personal Retirement Annuity (Policy Form No. EDVA-2005, et al.) is issued by Empire Fidelity Investments Life Insurance Company,® New York, N.Y. Fidelity Brokerage Services, Member NYSE, SIPC, and Fidelity Insurance Agency, Inc. are the distributors.

IMPORTANT: The projections or other information generated by Fidelity’s Income Strategy Evaluator tool regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

Estimates of potential income and assets illustrated by the tool are in future dollars and are based on data you have entered, product attributes and Fidelity Income Strategy Evaluator assumptions, including market performance assumptions based on hypothetical scenarios using historical data. Other investments not considered by Fidelity Income Strategy Evaluator may have characteristics similar or superior to those being analyzed. Numerous factors make the calculations uncertain, such as the use of assumptions about historical returns and inflation as well as the data you have provided. Our analysis assumes a level of diversity within each asset class consistent with a market index benchmark which may differ from the diversity of your own portfolio. Results may vary with each use and over time. Fund fees and/or other expenses will generally reduce your actual investment returns and, other than the applicable annual annuity charges for the variable annuity, are not reflected in the hypothetical projections generated by this tool.

Fidelity Income Strategy Evaluator and Retirement Income Planner are educational tools.

Guidance provided by Fidelity is educational in nature, is not individualized and is not intended to serve as the primary or sole basis for your investment or tax-plan

The retirement planning information contained herein is general in nature and should not be considered legal or tax advice. Fidelity does not provide legal or tax advice. This information is provided for general educational purposes only and you should bear in mind that laws of a particular state and your particular situation may affect this information. You should consult your attorney or tax advisor regarding your specific legal or tax situation.

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