If you’re not factoring health care costs into your retirement savings strategy, you could be setting yourself up for a nasty financial shock. 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 $260,0001 (in today’s dollars) to cover medical expenses throughout retirement, up from $245,000 in 2015.
And that applies only to retirees with traditional Medicare insurance coverage, and does not include costs associated with nursing home care. Fidelity estimates that a 65-year-old couple would need an additional $130,000 to insure against long-term care expenses.
“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 Fidelity’s Benefits Consulting business. “Rising health care expenses are forcing people to make educated decisions now more than ever, ranging from the services they utilize to the age they choose to retire.”
Health care cost drivers
Factors boosting this year’s estimate include life expectancy increases and anticipated annual increases for medical and prescription expenses. The estimate assumes enrollment in Medicare health coverage but does not include the added expenses of nursing home or long-term care.
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). In particular, long-term care costs are only covered by Medicare in limited circumstances. Fidelity’s $130,000 long-term care cost assumes a 65-year-old couple in a good health purchases a policy with $8,000 monthly maximum benefit, with three years of benefits, and an inflation adjuster of 3 percent per year.
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 you, your family, and your friends.
- Read Viewpoints: "Long Term Care: Challenges and Changes."
When you retire matters
Your particular health care costs in retirement will vary, of course, depending on your health and 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,2 health care costs should be factored into the retirement timing decision.
“We understand that some people don’t have a choice in when they retire,” Stavisky says. “Sometimes health issues or someone’s occupation plays a role. So it’s critical that people plan well in advance for the considerable cost of health care by adding it into their overall retirement planning discussions.”
As preretirees evaluate health insurance options for retirement, they may wish to consider, among other options, private 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.
- Read Viewpoints: "Six key Medicare questions."
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.3 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.
- Read Viewpoints: "Three healthy habits for Health Savings Accounts."
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917