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Retiree health costs fall

Our estimate now is $220,000 for a couple, down from 2012, but still daunting.

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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 costs estimate calculated by Fidelity Benefits Consulting, a 65-year-old couple retiring this year is estimated to need $220,0001 to cover medical expenses throughout retirement.

The good news: That figure represents an 8% decrease from last year, when the estimate was $240,000. The more sobering reality: For many Americans, health care is likely to be one of their largest expenses in retirement. What’s more, that $220,000 in estimated costs does not include any costs associated with nursing-home care and applies only to retirees with traditional Medicare insurance coverage.

Fidelity’s health care cost estimate had decreased only once before. That was in 2011, when the estimate declined $20,000 due to a one-time adjustment driven by Medicare changes that reduced out-of-pocket expenses for prescription drugs for many seniors. Between 2002 and 2012, the estimate had increased an average of 6% annually.

This year, the decrease in estimated retiree health care costs was due in part to lower-than-expected Medicare spending in recent years, as well as a reduction in projected Medicare spending in the near future.2

“While lower, this year’s estimate is still daunting for many retirees, and it will consume a considerable amount of a couple’s retirement savings,” said Brad Kimler, executive vice president of Fidelity’s Benefits Consulting business. “It is extremely important that health care costs are factored into retirement savings strategies today so that retirees can be prepared to pay their medical bills throughout retirement.”

Lower spending on Medicare

Medicare per-enrollee spending increased at a rate of only 0.4% in 2012, in line with relatively small increases in spending in recent years. Specifically, spending per enrollee rose just 1.9% between 2010 and 2012. This is significantly lower than historical increases, which have averaged 7% annually from 1985 to 2009.

A number of factors likely contributed to the recent trend of decreasing spending per enrollee, including the economic downturn that began in 2008, which led to a decrease in utilization of health care services. Also contributing to the decrease were smaller payment increases to providers (hospitals, physicians, health plans, etc.), and demographic changes. For example, as baby boomers retire, they bring a large influx of younger enrollees into the Medicare population, reducing the overall average age of participants. Young retirees tend to have lower health care expenses.

“What is surprising is that while the economy has strengthened, per-enrollee trends remain modest compared to historical rates,” continued Kimler. “Whether these trends are sustainable depends largely on the ability of the private health sector to find efficiencies in the delivery system.”

Though spending per enrollee has declined, it is important to note that increases in aggregate Medicare spending have grown at a faster rate due to a larger number of beneficiaries. While the current trend of lower spending per enrollee has had a positive impact on Medicare costs, the growth in Medicare enrollees over the next few years is expected to continue to strain Medicare-related resources.

A recent Fidelity study3 suggests that many consumers greatly underestimate the amount of savings they may need to cover health care costs in retirement. A recent poll of preretirees (aged 55–64) found that nearly half (48%) of respondents believe they will need only $50,000 to pay for health care costs in retirement.

“Creating a plan and starting to save as early as possible are two key aspects of a successful retirement savings plan,” added Kimler. “But it’s also important to identify a specific retirement income stream to address health care costs in retirement. Having assets that are earmarked for health care expenses will help ensure consumers can cover these costs when they arise, as well as help manage their overall retirement savings portfolio."

Consider opening a health savings account

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.

Learn more

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1. Source: Fidelity Benefits Consulting, 2013. Based on a hypothetical couple retiring in 2012, 65 years or older, with average (82 male, 85 female) life expectancies. Estimates are calculated for "average" retirees, but may be more or less depending on actual health status, area of residence, and longevity. Assumes individuals do not have employer-provided retiree health care coverage, but do qualify for 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. Fidelity’s estimate today assumes that government regulations affecting health care will remain unchanged. If some of the government regulations are changed, Fidelity’s estimate for retiree health care expenses could change.
3. The HSA survey was conducted by GfK Public Affairs & Corporate Communications from Feb. 4 to Feb. 20, 2013. The study was conducted among a nationally representative sample of 1,836 U.S. adults aged 25–64, with a household income of $25,000 or more. Respondents also have primary or shared responsibility for household financial decisions and receive health care benefits through their own or their spouse’s employer.
4. 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.
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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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