Fidelitys Retiree Health Care Cost Estimate Rises To $245,000 A Couple
A couple retiring this year, both age 65, should expect to spend an estimated $245,000 on health care in retirement, according to Fidelity’s 2015 Health Care Cost Estimate. That’s present value, after-tax money you would need at age 65, sitting in an investment account, earning 4% after-tax going forward.
What if you’re single? A male retiring this year at age 65 and living to 85 needs an estimated $115,000. A woman retiring at age 65 and living to 87 needs an estimated $130,000. (Because the assumption for life expectancy is different for men and women, you can’t cut the couples’ estimate in half; women need to save more.)
The $245,000 couples’ estimate is up from $220,000 last year. There are two main reasons for the jump: updated mortality assumptions and increasing medical and prescription drug costs. “Increasing drug costs is something everyone is keeping an eye on,” says Sunit Patel, senior vice president, Benefits Consulting, Fidelity Investments who worked up the estimates.
Of course, your actual expenses will vary based on your health, where you live, and how long you live. The estimates assume you don’t have employer-provided retiree health coverage (that’s a pretty good assumption) and you take the appropriate steps to enroll in Medicare (that burden is on you). “A lot of people think Medicare is there and it’s going to cover their expenses; they don’t know the details: there are all these different parts of Medicare, and they’ll have to buy a Medicare supplemental policy or Medicare Advantage,” Patel says. That still doesn’t cover everything.
What makes up the $245,000? A third of it is for Medicare Part B (doctor visits) & Part D (prescription drugs) premiums. A quarter is for out of pocket prescription drug costs. And the rest is for things that Medicare doesn’t cover like co-pays, deductibles, vision exams, and hearing aids.
What’s not included? Over-the-counter drugs. Dental expenses. Medicare premium surcharges if your income is over a certain threshold. And long-term care coverage. You really need to look at long-term care expenses separately.
The takeaway is that these are real costs that you really can’t ignore. “It’s hard to dial up or down,” says Patel. “You can adjust your choices in food or shelter; that’s difficult to do in the health care space.”
For at least some folks, those with high deductible health insurance plans, there is an immediate action step they can take to build a nest egg for retirement health care: establishing a health savings account. It’s a triple tax play: The money you contribute to an HSA is tax-deductible (for someone in the 33% tax bracket, that’s like getting a third off on your healthcare expenditures right off); the money grows tax-free; and you can withdraw it tax-free for out-of-pocket medical expenses, including Medicare premiums. To the extent your invested HSA dollars grow, that means even more tax savings. Some savvy HSA investors have accumulated $150,000 and up. The average HAS balance at year-end 2014 was a $1,933, according to the Employee Benefit Research Institute. “They’re underappreciated by most people,” Patel says, adding, “As individuals think about how high these expenses are, they should try to use these accounts for long-term savings.”