It’s no secret that the cost of health care in retirement is probably the biggest unknown hovering above most retirement plans. Pre-retirement, the biggest unknown expense for many families is often higher education for kids. Will they get scholarships? Will they attend a state school (and get relatively affordable in-state tuition)? Or will they get into a great, out-of-state college with no financial help at all, and need help from Mom and Dad or go into extraordinary debt? That’s a tough figure to budget for.
Similarly, most of us can’t know with any reasonable degree of certainty what kind of health issues we’ll run into as we age. We generally need to hope for the best and prepare for the worst, as they say.
To that end, Fidelity Investments has produced a new study about healthcare costs in retirement.
The “too long, didn’t read” summary: Fidelity estimates that a 65-year-old couple retiring today should be prepared to spend $285,000 in medical expenses during retirement. For a single person, it’s in the $135,000-$150,000 range.
Fidelity makes the assumption that you will be covered by Medicare parts A and B, which covers hospital and medical insurance. So that $285,000 figure is in addition to basic Medicare coverage.
Hopefully the fact that you’ll have to pay anything out of pocket even if you’re covered by Medicare is not a surprise. If you want coverage for prescription drugs and dental care and lots else besides the very basics, you’ll likely be paying into a Medicare Advantage Plan (Medicare Part C) on an ongoing basis.
In the study, Fidelity has a hypothetical 35-year-old couple putting away about $2,800 annually in a Health Savings Account (HSA) until they are 65. Fidelity says these contributions, assuming 7% returns annually, would shoulder the anticipated burden. I used WealthTrace’s financial planning application to run Fidelity’s assumptions through a retirement plan, and Fidelity has it right.
To Be Taken With a Grain of Salt—and an HSA
To quote Fidelity’s study, “We recognize that when today’s 35-year-olds retire in 2049 their medical costs could be more than this year’s estimate, and the U.S. health care system could potentially look dramatically different.”
Yes, that’s for sure. A similar sentiment might apply to pretty much anything predicted to happen that many years out. The costs could be more; they could be less. The point is to start to do something to prepare. If you don’t end up needing the money for health care, great–you’ve saved it and it has compounded in value and you can use it for something else.
Fidelity would love it if you opened up an HSA with the company–that’s why they did this study, after all. They want your investment assets. But just because this is something of a sales pitch on their part doesn’t make it a bad idea.
If you’re not familiar with HSA’s, you can get some details about them here. They are similar to IRAs or 401(k)s in that you save the money on a pre-tax basis. But with an HSA, your withdrawals will not be subject to any tax if you use the money to pay health care costs. (If you use the funds to pay for something else, it will be taxed as income and you’ll be hit with a 20% penalty up to age 65; the penalty goes away if you’re over 65.)
If you’re allowed to have an HSA and have the resources to fund one, it’s definitely worth considering. You may not be eligible–you have to have a high-deductible insurance plan, with a $2,700 deductible for a family currently ($1,350 for an individual). It also probably makes sense to first contribute as much as you can to other qualified tax-deferred accounts such as IRAs (currently $6,000 before 50, $7,000 if you’re 50 or older) and 401(k)s ($19,000 before 50, $25,000 if you’re 50 or older). If you have those accounts topped up, and you’re eligible, an HSA should be next on your list.
The future is as unknowable as ever. That applies to health care costs as well as potential health issues down the road. What we do know is that having a plan in place to deal with the unknowable is always preferable to being entirely unprepared.
