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Retiree health care costs continue to surge

Tab for your health care post-age 65? Try $275,000 per couple.

  • Health Care & Wellness
  • Saving for Retirement
  • Health Savings Account
  • Long-Term Care Insurance
  • Retirement Accounts
  • Health Care & Wellness
  • Saving for Retirement
  • Health Savings Account
  • Long-Term Care Insurance
  • Retirement Accounts
  • Health Care & Wellness
  • Saving for Retirement
  • Health Savings Account
  • Long-Term Care Insurance
  • Retirement Accounts
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Key takeaways

Retiree health care costs continue to rise.

  • The estimate for retiree health care spending rises to an average of $275,000 per couple, excluding long-term care expenses.
  • This is an increase of $15,000 from 2016.
  • Health care continues to be one of the largest expenses in retirement.

If you're not factoring health care costs into your retirement savings strategy, you could be setting yourself up for major financial angina. According to the latest retiree health care cost estimate from Fidelity Benefits Consulting, a 65-year-old couple retiring this year will need an average of $275,0001 (in today's dollars) to cover medical expenses throughout retirement, up from $260,000 in 2016.

And that applies only to retirees with traditional Medicare insurance coverage, and does not include costs associated with nursing home care.

"The sticker shock of this estimate hopefully reinforces for many people that they need to act now, regardless of their age," says Adam Stavisky, senior vice president of the Benefits Consulting business at Fidelity Investments. "Rising health care expenses are forcing people to rethink important financial and health decisions now more than ever, ranging from the services they use to the age they choose to retire."

Saving for future health care needs

For people enrolled in high-deductible health plans paired with health savings accounts (HSAs), they may open an HSA to save for qualified health care expenses today and in retirement. HSAs are a convenient way to pay for current and future medical expenses through a tax-advantaged account.2 Contributions that are not spent each year may carry over and be invested to help pay for health care in retirement. In addition, the accounts are portable for individuals who change employers.

Tip: At age 65, you can use money from your HSA to pay for Medicare Parts A, B, and D and Medicare Advantage premiums, tax free and penalty free. You cannot use your HSA to pay for Medigap insurance premiums. Read Viewpoints: Three healthy habits for Health Savings Accounts at Fidelity.com.

Plan for long-term care

While Medicare is designed to cover many of your health-related expenses in retirement, it does not cover everything (see graphic). Of course, long-term care expenses are based on many factors, and the need for long-term care insurance (and level of coverage) is highly dependent on individual circumstances.

Long-term care is a key risk to your retirement plan, and you need to plan for it. It will affect you and your caregivers financially, physically, and emotionally. Having a plan to address these concerns is critical to easing the burden of this risk on yourself, your family, and your friends.

Tip: Read Viewpoints: Long Term Care: Challenges and Changes at Fidelity.com.

When you retire matters

Your particular health care costs in retirement will vary, of course, depending on your health and your insurance and other medical costs. But another critical factor is when you retire. Medicare eligibility begins at age 65. Similar to the decision preretirees make about when to start claiming Social Security,3 health care costs should be factored into the retirement timing decision.

"Knowing exactly when you'll retire is tricky. Health issues, caregiving duties, or someone's occupation can play a role in your decision to retire," says Stavisky. "Even if you are a very healthy person today, it's critical that you plan well in advance for the considerable cost of health care, by adding it into your overall retirement planning discussions."

As preretirees evaluate health insurance options for retirement, they may wish to consider, among other options, Medicare Advantage programs available in their area. Under typical Medicare Advantage plans, people pay monthly premiums to a private insurer and in many cases have a higher percentage of claims and prescriptions covered versus traditional Medicare. Over an extended time period like a couple's retirement, this option could reduce their overall costs. One warning: Certain plans come with a lot of restrictions that may constrain you to receiving service only in a specific geographic area, or from a limited network of health care providers.

Tip: You and your spouse should choose your insurance separately. Once the older spouse or partner reaches age 65, health insurance becomes an individual decision. Since there is no "joint" or "family" coverage under Medicare, it may be most cost-effective for you and your spouse to choose different coverage options from separate insurance companies.

There are lots of health care and financial decisions to make as you transition to retirement. In addition to needing a strategy to claim retirement income and Social Security, you may need to develop a strategy to help you bridge the gap until you are eligible for Medicare coverage at age 65. Once you are eligible to enroll in Medicare, be sure to get the health care part of the equation right.

Read Viewpoints: Six key Medicare questions and Your bridge to Medicare at Fidelity.com.

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