Estimated Retiree Health Care Costs Creep to New High

May 10, 2021

retiree health care costsOne of the biggest concerns and uncertainties about retirement costs is healthcare, and—based on new estimates—with good cause.

In fact, Fidelity Investments' 20th annual Retiree Health Care Cost Estimate claims that a 65-year-old, opposite-gender couple retiring this year can expect to spend a whopping $300,000 in health care and medical expenses throughout retirement—an 88% increase since 2002. For single retirees, the 2021 estimate is $157,000 for women and $143,000 for men.

While this year’s estimate marks a new high, up 30% from 10 years ago when the amount was $230,000, the good news is that it is up just 1.7% from 2020 ($295,000) as health care inflation has remained relatively flat over the last few years.  

The firm began calculating the costs in 2002 to build greater awareness of estimated health care costs and the importance of starting to plan and save early to meet those anticipated expenses.

To that end, Fidelity emphasizes that broader awareness is needed, as 58% of current employees say they have “spent little or no time” thinking about what they need to cover in retirement. What’s more, even among those who have, 50% believe they’ll need just $50,000 or less to meet health care expenses.

The estimates assume 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.

HSA Offerings

One positive is that, in addition to reported record high savings rates and balances across 401(k), 403(b) and IRA accounts at the end of 2020, Fidelity’s data shows 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,” says Hope Manion, senior vice president, Fidelity Workplace Consulting. “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.”

In fact, Fidelity notes that, at the start of the year, just 16.5% of its HSAs were invested, but that’s an increase from 11.2% at the beginning of 2020.

Meanwhile, as an example of the potential benefits of an HSA, Fidelity’s analysis shows that by maxing out HSA savings opportunities and investing at an average hypothetical 7% annual rate of return, a couple could accumulate $300,000 after approximately 18 years and a balance of nearly $1 million after 30 years.

A second example shows that—for a couple who contributes the maximum but withdraws 50% each year to pay for current qualified medical expenses and leaves the remaining 50% invested, also earning an average 7% return—the balance still has the potential to grow to $300,000 after 25 years and reach nearly half a million dollars after the 30-year time frame.

COVID-19 Impact

One wild card in planning for health care expenses in retirement is that the COVID-19 pandemic has prompted many to rethink their retirement plans. A separate study by Fidelity shows that 82% of Americans say the pandemic has impacted their retirement plans.

For those within 10 years of retirement, approximately one in five (22%) say they are accelerating their timeline to leave the workforce. And 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, including additional financial implications that need to be considered, Fidelity notes.