Retirees Need $130,000 Just to Cover Health Care, Study Finds
Out-of-pocket cost estimates that had held steady have now hit a record high.
Ben Steverman
August 16, 2016 — 6:00 AM EDT -
Today's 65-year-olds can expect to spend an average of $130,000 on
health care during their retirement, from premiums to co-payments to
eyeglasses, according to new estimates.
The average single 65-year-old woman can expect to
need $135,000 to spend on health care in retirement, while a man
will spend $125,000, according to estimates
from Fidelity Investments. (The difference is because the woman is expected to
live longer—an additional 22 years, vs. 20 years more for the man.)
Every year, Fidelity estimates how much it will cost for today's average
65-year-olds to cover health-care expenses for the rest of their lives if they
retire now. For a while, it looked as if health care costs were holding steady,
but Fidelity this year says couples need to set aside a record $260,000 for
Medicare premiums and all other out-of-pocket medical costs—up 6 percent from
last year and 18 percent from 2014.
Prime culprits in accelerating health expenses are prescription drugs,
especially high-priced specialty drugs, Fidelity says. And as the economy
recovers, retirees are using more health care, driving up costs.
Fidelity's estimates, based on an analysis of Medicare's claims database and
trends in survey data, assume that retirees are eligible for Medicare and
try to capture all the costs it doesn't cover—including premiums,
co-payments, and things Medicare doesn't pay for, such as hearing and
vision exams. But the estimates are only averages, and people's costs
can vary widely, according to where they live and how healthy they are.
The estimates also don't include long-term care, the
sometimes-astronomical costs of home health care or nursing homes that aren't
covered by Medicare. Long-term care insurance is
available but expensive; although premiums vary greatly, Fidelity
estimated that a retired couple would need to pay
an additional $130,000 for a policy offering an
inflation-adjusted $8,000 per month for long-term care over three years. (It did
not examine the cost of a policy for a single person.)
Such insurance offers protection against expenses so huge that they
can bankrupt even upper-middle-class retirees, forcing them to spend their
assets and go on Medicaid, the insurance program for low-income Americans—which,
unlike Medicare, does cover long-term care. Still, long-term care insurance
isn't the right option for everyone, cautioned Adam Stavisky, senior vice
president of benefits consulting at Fidelity. Some retirees simply can't afford
such high premiums, while wealthier retirees might be better off
setting aside money for long-term care expenses, in case they arise.
For many Americans, $260,000 may seem an impossible amount to save on
top of other retirement expenses, but financial planners say several strategies
can help.
First, get the right Medicare supplemental insurance policies. The program is
complicated, and retirees may need help from an expert or an organization such
as AARP to get it right. "It is astonishing how little people know and how
confused they are on this subject," said Frank Boucher, a financial planner in
Reston, Va. "Having the right combination of Medicare and a good supplemental
policy should cover most health-care costs."
Second, save for health care in a tax-efficient way. If your employer
provides a high-deductible health insurance policy, you're eligible for a health
savings account. Workers can contribute to HSAs with pre-tax
money, providing an immediate tax break, and let the money compound
over many years. Any withdrawals used for health care aren't taxed. Even those
without HSAs can deduct medical expenses on their taxes if the
costs add up to more than 10 percent of their adjusted gross incomes. (For
taxpayers 65 and over, the threshold this year is 7.5 percent.)
Third, consider creative strategies to maximize income late in life, when
health-care costs tend to rise. By waiting until they're 70 to take Social
Security benefits, retirees reap bigger benefits—76 percent higher than if they had taken them at
age 62. No safe investments provide that kind of return these days, said Steven
Medland of TABR Capital Management, and "those higher benefits last for the rest
of the client's life, even if they live until age 110."
Another strategy is a longevity annuity, an insurance policy that
provides an income stream that begins only once retirees reach
age 80 or 85. Because many people don't live that long, longevity insurance
is far cheaper than other kinds of annuities. "A person can make their
retirement nest egg go much further," says Barbara Camaglia, the president of
Legacy Financial Advisors in Beachwood, Ohio. Retirees can then spend more
freely early in retirement, knowing they're guaranteed to get a regular annuity
check in their final years.