Managing Healthcare Costs in Retirement

Fidelity: Higher costs for those who retire before 65, less for those who delay

June 13, 2014 – BOSTON–(BUSINESS WIRE)–Couples retiring at age 65 are expected to incur $220,000 in health care costs on average during their retirement years, according to the 2014 Retiree Health Care Cost Estimate by Fidelity Investments®. The estimate is consistent with 2013 and doesn’t include the added expenses of nursing home or long-term care and assumes traditional Medicare coverage. While unchanged over 2013, the estimate reinforces the need to incorporate health care into retirement planning conversations – including how much to save and when to retire.

A recent Fidelity survey found that when asked, pre-retirees planned to retire at an average age of 65. However, recently retired respondents said they did so at 62 on average, often by choice but sometimes due to health issues or physical limitations. This gap points to a growing reality for many individuals and couples who are at risk of facing far greater health care costs in retirement than anticipated.

In response, Fidelity estimated the possible extra health care costs for couples who start their retirement at 62 as well as potential savings for those who can delay it to 67. Similar to the decision pre-retirees make about when to start claiming Social Security, health care costs should be factored in to the retirement timing decision. For couples who opt to retire at age 62, they can anticipate an additional estimated cost of $17,000 per year. The extra costs are health insurance premiums for this period prior to Medicare eligibility and estimated out-of-pocket costs. On the other hand, the potential annual cost reduction for couples who can delay retirement to 67 could be $10,000 per year.

“Rising health care expenses are forcing people to make educated decisions now more than ever, ranging from the services they utilize to the age at which they choose to retire,” said Brad Kimler, executive vice president of Fidelity’s Benefits Consulting business. “We understand some people don’t have a choice in when they retire. Sometimes health issues or someone’s occupation play a role. So it’s critical that people plan well in advance for the considerable cost of health care by adding it into their overall retirement planning discussions.”

Health Care Costs for Retirees Remain Daunting, but have Moderated

Fidelity’s estimate underscores that while health care costs in retirement are significant, they have moderated in recent years. Factors that play a role include:

  • Long-term prescription drug savings due to the gradual closure of Medicare Part D’s “donut hole”6 leaving retirees with a reduced, 25 percent co-insurance cost by 2020 where there was previously no coverage at all.
  • The trend of slower Medicare spending per enrollee through 2022, as projected by the U.S. Department of Health & Human Services7.
  • An increasingly cautious – and selective – health care consumer as ongoing economic uncertainty is leading to reduced utilization of discretionary health care services, such as elective surgeries.
health care costs should be factored in to the retirement timing decision

“Even if couples make informed decisions, the only real prescription to prepare financially for health care costs in retirement is to plan well in advance to optimize health and wealth,” said Kimler.

Consider Tax-Advantaged Health Care Savings Opportunities

In an effort to help both companies and employees reduce health care expenses, many companies offering high-deductible health plans (HDHP) combine them with health savings accounts (HSA). Similar to how workplace retirement savings plans such as 401(k)s provide tax-advantaged savings, HSAs offer tax-advantaged opportunities to save for qualified medical expenses both today and in retirement.

Fidelity encourages employers to consider adopting HDHPs and HSAs to help foster a culture of savings within their workplace. The combination of an HDHP and HSA makes for a powerful health care savings option now and in the future, as HSAs allow pre-tax dollars that are unspent each year to carry over and stay invested tax free for qualified medical expenses in retirement8.

Seek Guidance on How to Transition into Retirement

To help individuals and couples better plan for health care expenses in retirement, Fidelity issued two informative Viewpoints articles (“Retiree Health Costs Fall” and “How to Tame Retiree Health Care Costs”). The firm also provides comprehensive guidance to its workplace participants through its Plan for Life experience. Part of this experience helps pre-retirees transition into retirement by offering comprehensive retiree income solutions; guidance around how and when to begin claiming Social Security payments; and help finding private insurance options on the exchange marketplace9. Participants receive guidance from licensed benefit advisors who offer assistance navigating the Medicare exchange environment and selecting Medicare Advantage and Medicare Supplemental plans from national and regional providers. This support complements ongoing retirement guidance from Fidelity to help participants adapt to their changing needs.





About Fidelity’s Benefits Consulting
Fidelity’s Benefits Consulting business helps employers nationwide assess the effectiveness of their benefits programs. The business provides a holistic approach to benefits design, strategy, funding, communications and delivery by looking at clients’ health care and retirement plans before diagnosing business solutions. The group’s specialties include retirement and health care plan consulting, custom data administration, compliance and employee communication. Benefits Consulting has offices in Boston, New York City, San Francisco, Chicago, Raleigh, Dallas and Merrimack, N.H.

About Fidelity Investments
Fidelity Investments is one of the world’s largest providers of financial services, with assets under administration of $4.7 trillion, including managed assets of $1.9 trillion, as of April 30, 2014. Founded in 1946, the firm is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing and many other financial products and services to more than 20 million individuals and institutions, as well as through 5,000 financial intermediary firms. For more information about Fidelity Investments, visit