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Retiree health costs hold steady

Our estimate is $220,000 for a couple, unchanged from 2013, 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 cost estimate from Fidelity Benefits Consulting, a 65-year-old couple retiring this year will need an average of $220,0001 (in today’s dollars) to cover medical expenses throughout retirement.

The good news: That figure has held steady since last year, down from a peak of $250,000 in 2010. 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.

“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,” says Brad Kimler, executive vice president of Fidelity’s Benefits Consulting business.

Health care cost drivers

After increasing an average 6% a year for nearly a decade, Fidelity’s retiree health care cost estimate has declined gradually since 2010. In 2011, the estimate declined $20,000 because of a one-time adjustment, driven by Medicare changes that reduced out-of-pocket expenses for prescription drugs for many seniors. Then in 2013, it dropped again to $220,000, and held steady in 2014, because of a combination of factors. Among the drivers: lower-than-expected Medicare spending,2 continued long-term savings on prescription drugs because of the gradual closure of Medicare Part D’s “donut hole,”3 and an increasingly cautious—and selective—health care consumer.

Also contributing to the drop in retiree health care costs since 2010 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. In general, young retirees tend to have lower health care expenses than older retirees.

Though spending per enrollee has declined since 2010, it is important to note that increases in aggregate Medicare spending have grown at a faster rate because of 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.

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.

Fidelity estimated the possible extra health care costs for couples who start their retirement at 62, as well as potential savings for those who can delay it to 67. Similar to the decision preretirees make about when to start claiming Social Security,4 health care costs should be factored into the retirement timing decision.

Couples who opt to retire at age 62—instead of 65—can anticipate an additional estimated annual cost of $17,000 per year, for a total of $271,000 during retirement. The extra costs include health insurance premiums for the period prior to Medicare eligibility and estimated out-of-pocket costs. On the other hand, the potential annual cost reduction for couples who can delay retirement to 67 could be $10,000 per year, reducing their estimated costs for health care in retirement to $200,000.

“We understand that some people don’t have a choice in when they retire,” Kimler 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.”

Consider opening a Health Savings Account.

In an effort to help ensure that 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, 2014. The estimate is based on a hypothetical couple retiring in 2014 at age 65 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. The estimate assumes that 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. Analysis from The Medicare Blog of the Centers for Medicare & Medicaid Services.
4. Social Security’s full retirement age depends on a person’s year of birth and may be determined by visiting www.ssa.gov.
5. 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.
Fidelity Income Strategy Evaluator is an educational tool.
Retirement Income Planner is an educational tool.
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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Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

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