A 65-year-old couple retiring this year can expect to spend $300,000 in health care and medical expenses throughout retirement, according to Fidelity’s 20th annual Retiree Health Care Cost Estimate, released today.
That can throw a wrench in retirement planning for those not realistically taking health care costs into account.
For single retirees, the 2021 estimate is $157,000 for women and $143,000 for men.
This year’s estimate marks a new milestone high, up 30% from 10 years ago when the amount for a 65-year-old couple was $230,000, but just 1.7% from 2020 ($295,000) as health care inflation has remained relatively flat over the last few years.
Fidelity began measuring estimated retirement health care expenses in 2002. Since then, the estimate has risen a total of 88% (from $160,000).
“While this past year has certainly made protecting our health today a priority, we need to do the same when planning for future health care needs,” said Hope Manion, senior vice president, Fidelity Workplace Consulting. “Covering health care costs is one of the most significant, yet unpredictable, aspects of retirement planning. By providing this estimate for retirees, we want to increase awareness among people of all ages to help them proactively get more engaged in saving and investing, so they can be better prepared in years to come.”
Broader awareness is much needed, as 58% of current employees say they have spent little or no time thinking about what they need to cover in retirement. Even among those who have, 50% believe they’ll need just $50,000 or less to meet health care expenses. Another recent Fidelity survey found most people vastly underestimate the cost of out-of-pocket health care for a couple in retirement, with 37% guessing between $50,000-$100,000.
Fidelity’s new estimate assumes both members of the couple are enrolled in traditional Medicare, which between Medicare Part A and Part B covers expenses such as hospital stays, doctor visits and services, physical therapy, lab tests and more, and in Medicare Part D, which covers prescription drugs.
How to save $300k, and beyond
While Fidelity’s estimate is for an opposite-gender couple retiring this year, the company says it also should be a call to action for younger Americans to start saving early and consistently, as health care costs will likely continue to rise. Diligent savings habits and utilization of accounts where savings can be invested are powerful tools in helping to build a health care nest egg, regardless of age.
The good news is saving for both retirement and health care is on the rise. Fidelity’s own customer data, representing millions of working Americans across the country, reported record high savings rates and balances across 401k, 403b and IRA accounts at the end of 2020. As well, Fidelity has seen a significant increase in new Health Savings Account (HSA) openings (19%), with total assets growing 52% to surpass $10 billion this past year.
“While higher savings rates and growing balances are good news, the goal of saving toward a significant amount like $300,000 can be daunting. But it is achievable with some planning,” added Manion. “We continue to see many HSA owners not using these accounts to their full potential, in particular not using the power of investing to potentially grow their savings. And that’s the step that can make a big difference, especially for younger people with time on their side.”
The ability to invest contributions for potential growth, tax-free, is one of the most valuable aspects of an HSA, but it is also one of the most underutilized. At the start of the year, just 16.5% of Fidelity HSAs were invested. Though Fidelity says this figure is more than double the industry average and an increase from 11.2% at the beginning of 2020, this still represents a significant missed opportunity for those with cash balances intended to be used for future health expenses.
Consider a couple saving and investing their annual HSA contributions over a 30-year period, taking into account that a future health care savings goal will likely be greater than $300,000 over time. The accompanying chart below shows two examples. First, by maxing out HSA savings opportunities and investing at an average hypothetical 7% annual rate of return, a couple could potentially accumulate $300,000 after approximately 18 years, and a balance of nearly $1 million after 30 years.
Since not everyone is able to do that, the second example represents a couple who contributes the maximum, withdraws 50% each year to pay for current qualified medical expenses but leaves the remaining 50% invested, also earning an average 7% return. This balance still has the potential to grow to $300,000 after about 25 years, reaching nearly half a million dollars after the 30-year time frame illustrated.
COVID-19 impact on retirement plans
Sometimes even with a plan in place, as people get closer to retirement there can be a need to adjust, either by choice or necessity. According to a recent Fidelity study, 82% of Americans say the pandemic has impacted their retirement plans. For those within 10 years of retirement, one-in-five (22%) say they are accelerating their timeline to leave the workforce. Of this group, 80% are under the age of 65, meaning they will need to bridge their health care options before eligibility for Medicare kicks in.
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Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
