Retirement Health Cost Estimates Hit New High

A new report estimates that health care for a 65-year-old couple retiring this year will cost 6% more than a year ago – the highest estimate since 2002.

According to Fidelity’s Retiree Health Care Cost Estimate, a 65-year-old couple retiring in 2016 will need an estimated $260,000 to cover health care costs in retirement, a 6% increase over last year’s estimate of $245,000 and the highest estimate since calculations began in 2002.

The 6% increase in this year’s estimate was attributed to several factors, including an uptick in the utilization of medical services and rapidly rising drug costs.

The estimate applies to retirees with traditional Medicare insurance coverage and provides a general idea of the monthly expenses associated with Medicare premiums, Medicare copayments and deductibles, and prescription drug out-of-pocket expenses.

What Are the Odds?

In October 2015, the nonpartisan Employee Benefit Research Institute (EBRI) estimated that a 65-year-old man needs $68,000 in savings and a 65-year-old woman needs $89,000 if each has a goal of having a 50% chance of having enough money saved to cover health care expenses in retirement. If either instead wants a 90% chance of having enough savings, $124,000 is needed for a man and $140,000 is needed for a woman, though that analysis did not factor in the savings needed to cover long-term care expenses.

For a married couple both with drug expenses at the 90th percentile throughout retirement who want a 90% chance of having enough money saved for health care expenses in retirement by age 65, EBRI noted that targeted savings increased from $326,000 in 2014 to $392,000 in 2015.

For Fidelity’s analysis, the estimate based on a hypothetical couple retiring in 2016, 65 years old, with average life expectancies of 85 for a male and 87 for a female. They are calculated for “average” retirees, but, as Fidelity notes, may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes. The Fidelity Retiree Health Care Costs Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government’s insurance program, Original Medicare.

That 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 Original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care.

Long-Term Cares?

While Medicare covers many health-related expenses in retirement, long-term care costs are only covered by Medicare in limited circumstances. Fidelity estimates that a 65-year-old couple would need $130,000, in addition to savings for retiree medical expenses, to insure against long-term care expenses. This assumes the couple is in a good health and purchases a policy with $8,000 monthly maximum benefit, with three years of benefits, and an inflation adjuster of 3% per year.

The report notes that long-term care expenses are based on many factors, and the need for long-term care insurance (and level of coverage) is highly dependent on individual circumstances.

Add Your Comments

3 Comments

  1. Jay Gosselin
    Posted August 18, 2016 at 10:32 am | Permalink

    Thank you for your article. Why are the annual HSA contribution limits so low ($3,350 Individual/$6,750 Family)? My company just started offering a HSA and if I contributed the maximum individual contribution each year from now (age 47) until I retire at age 67 (including $1K catch up from age 55 – 67), I would only have $104,350 saved for healthcare expenses (provided that I don’t use any of the funds between now and then). I believe that the annual HSA contribution limits should mirror 401(k) limits ($18K annually and $6K catch up at age 50). What are your thoughts?

    Thanks,
    Jay Gosselin

  2. Nevin E. Adams, JD
    Posted August 19, 2016 at 8:10 am | Permalink

    Jay,

    The simple (and accurate) answer is that that is the limit imposed by law. There have been legislative attempts to change that, but they haven’t been successful. A couple of the GOP presidential candidates talked during the debates about a bigger emphasis on HSAs, but that didn’t get much traction there, either. I suspect that many on Capitol Hill still view these accounts as being more about letting the better-off save more – something that they don’t view as essential.

    Nevin

  3. url url'>Mark Miller
    Posted August 30, 2016 at 12:20 pm | Permalink

    One of the health & welfare client service reps in our office is questioning Fidelity’s Retiree Health Care Cost Estimate. According to her: First the highest cost I have seen per year for Medicare Part B, Supplement and RX card. Leaving the individual with only copays out of pocket is $ 8,400 per yr.($700 mo.)

    This equates to an estimated 10 year life span after retirement of $84,000 for each person.

    For a couple to spend $392,000, they would have to live 23 years after retirement. 392,000 divided by 700 monthly = 560 months which equals 46 years divided by 2 is 23 years each. Means they expect the average person to live to age 88.

    Any thoughts on this?
    Thanks
    MSM

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