Retiree health costs rise

A couple may need to spend almost $400,000 on health care in retirement. Planning is key.

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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.

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.

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.

Learn more

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1. Estimate based on a hypothetical couple retiring in 2016, 65-years-old, with average life expectancies of 85 for a male and 87 for a female. Estimates are calculated for “average” retirees, but may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes. 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, Original 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 Original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care. Life expectancies based on research and analysis by Fidelity Investments Benefits Consulting group and data from the Society of Actuaries, 2014.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.
2. Social Security’s full retirement age depends on a person’s year of birth and may be determined by visiting ssa.gov.
3. Contributions, investment earnings, and distributions are tax free for federal tax purposes if used to pay for qualified medical expenses, and may or may not be subject to state taxation. See your tax professional for more information, or see IRS Publication 969. The administration of an HSA is an individual responsibility; see a tax professional for more information.
Guidance provided by Fidelity through the Planning & Guidance Center is educational in nature, is not individualized, and is not intended to serve as the primary basis for your investment or tax-planning decisions.
IMPORTANT: The projections or other information generated by Fidelity’s Planning & Guidance Center Retirement Analysis regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary with each use and over time.
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 adviser regarding your specific legal or tax situation.
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