Retiree Health Care Costs Moderate, According to Fidelity Study

Fidelity’s latest annual study of retiree health care costs is out and for the first time in nearly a decade it shows no increase in costs over the previous year’s estimate. The company said a 65-year-old couple retiring this year can expect to spend $315,000 on health care costs throughout their retirement — the same as last year. The company attributes the moderating cost of health care to new limits on what retirees can expect to spend on prescription drugs, beginning in 2025, due to the Inflation Reduction Act.

Fidelity’s calculation assumes a couple uses original Medicare (not Medicare Advantage) and the tally takes into account premiums, including Part D prescription drug coverage, as well as deductibles and co-insurance costs. It does not account for the costs of over-the-counter medications, most dental services, or long-term care.

Putting a big number into context

While $315,000 is still a lot of money, breaking it down to annual and monthly costs can add helpful context.

For example, if a couple retires at 65 and then lives another 20 years, Fidelity’s total cost estimate works out to $15,750 per year or $1,312.50 per month. That could be less than a younger person is paying per month for health care right now. On the other hand, Fidelity’s estimate is an average. Individual people’s actual health care needs vary considerably. The big unknown is whether you will need long-term care, and if so, how much care, for how long, and at what cost?

A reality check

One of the most important aspects of the study is that it highlights the need for today’s workers to gain a more realistic view of their future health care costs. Fidelity has found that U.S. adults believe a couple retiring this year will spend just $41,000 on health care throughout their retirement, an unrealistically low estimate.

A solution for some

Fidelity and SMI have pointed to the opportunity many younger workers have to prepare for later life health care costs with a health savings account (to qualify, you need to have a high-deductible health insurance plan). Fidelity has found that a much higher percentage of those with an HSA feel prepared for their health care expenses in retirement than those who do not have an HSA, which is not surprising.

Using the example of a 35-year-old couple that maxes out HSA contributions and invests the balance, assuming an average annual return of 7%, Fidelity says the couple could use half of their HSA money for current expenses and still end up with a later life health care nest egg of nearly $500,000. If the couple had enough money to pay current health care costs with other funds, thereby not tapping any of the HSA money during their working years, they could end up with nearly $1,000,000.

A "Super IRA"

The consulting firm Willis Towers Watson encourages people to think of an HSA as a retirement account, and we agree. The company suggests that qualifying workers make funding such an account their second-highest retirement-investing priority, right after contributing enough in a workplace retirement plan to receive all available matching money an employer offers.

An HSA has the advantages of a traditional IRA and a Roth. Contributions are tax-deductible, investment gains are not taxed, and withdrawals are tax-free as long as the money is used for qualified health care costs. (See this decision tree for guidance on how to coordinate the use of a workplace retirement plan, an IRA, and an HSA.) A number of HSA providers allow balances to be invested, not just saved, and Morningstar’s most recent evaluation of the HSA landscape gave Fidelity its highest marks. In fact, Fidelity was the only provider to receive Morningstar’s “High” assessment on a five-tier scale. Calling it the “the most attractive HSA for both spenders and investors,” Morningstar noted that Fidelity offers a wide range of investment options and low fees. Opening a Fidelity HSA would enable you to use any SMI strategy to manage that account. The SMI Funds and SMI Private Client also allow for the use of HSAs, with Private Client able to manage balances using a custom blend of SMI strategies.

(Numerous SMI members have written to tell us they’ve had a good experience with the HSA account offered by Lively.)

Other steps you could take to better prepare for post-retirement health care costs include:

• Once you turn 65 and are eligible for Medicare, give careful consideration to which will be more beneficial to you — a Medicare Advantage plan or traditional Medicare plus Medigap. Some Medicare Advantage plans will pay for expensive items such as hearing aids, which traditional Medicare does not cover. If you plan to split your time in retirement, living in two locations, be sure the plan you choose will cover you in both places.
• Have honest conversations with your family about future medical care issues. People often “don’t want to be a burden” to their adult children, but those children may be very open to the idea of a multi-generational living arrangement, which used to be much more common.
• Consider what you would do in case you need long-term skilled nursing care. What’s the likelihood? Do you have a family history of dementia? Should you consider a policy?

What are you doing to prepare for later life health care costs?

*Image used with permission. *