By Reshma Kapadia, April 2, 2019
The average couple needs $285,000 to fund health-care retirement costs—and that is before factoring in long-term care, dental or the premiums paid for Medicare for higher-income couples. For some perspective, the average balance in a Fidelity 401(k) for 60- to 64-year-olds was $183,700. Those near-retirees may of course have other accounts, but it still speaks to the possible shortfall.
Health-care costs can be one of the biggest expenses in retirement but it’s hard to estimate since averages can be misleading when it comes to medical care and policy changes. The potential repeal and replacement of the Affordable Care Act and the future of Medicare could dramatically impact estimates. Fidelity’s estimate assumes that both members of a retiring couple are eligible for Medicare, which between Medicare Part A and Part B covers expenses such as hospital stays, care at a skilled nursing facility, doctor visits and services, physical therapy, lab tests, and more. About 40% of the estimated cost comes from premiums for Medicare, such as Part B or Part D, and doesn’t include the surcharges for higher-income retirees. Another 40% goes toward deductibles and copays and the remaining 20% is for prescription drugs.
A single 65-year-old man should estimate $135,000 for health-care costs but a single woman should plan for at least $150,000 because women tend to live longer than men. Fidelity’s estimate, however, doesn’t include one of the biggest wild cards in retirement: long-term care. Based on the work of Employee Benefit Research Institute, some sort of catastrophic long-term care cost is the single-biggest risk factor for households to go from having enough money for retirement at 65 to not having adequate retirement income, according to EBRI research director Jack VanDerhei. But Fidelity’s Manion says it is hard to come to a general estimate for long-term care at this point given the multitude of possible scenarios.
For those not yet in their 60s, the estimate could also be misleading. “If I’m talking to someone who is 45, we have no idea what health care costs will look like at 65 so the statistic is less relevant,” Manion says. “As an actuary, there is a cliff to estimating beyond 10 years. But the advice is: Save as much as you can early, and often.”
One of the steps financial planners regularly recommend to do so is a health savings account, which is eligible with a high-deductible health-insurance plan. An HSA allows people to contribute pretax money that can grow tax-free and be withdrawn tax-free for health-care expenses. An individual can contribute $3,500 a year, a family can contribute $7,000 and those over 55 can kick in an additional $1,000. Manion says many people may be over-insured in a traditional preferred provider organization (PPO) plan. One way to gauge if a high-deductible HSA-eligible plan is a good option is to look at the out-of-pocket maximum on such a plan and see if the person covered has enough funds tucked away to cover deductibles and the maximum possible expense in the event of a catastrophic issue.
The number of HSAs has risen sharply to about 25 million last year from 10.7 million in 2013, according to research firm Devenir. But that may be overstating the use of these accounts. A March report by the Employee Benefit Research Institute showed slower growth in the companion HSA-eligible health-plan enrollment in 2018 and about 36% of HSA accounts in 2017 had no contributions, up from 30% in 2014. That suggests people have opened accounts but may no longer be funding them. Even more striking: Only a small minority of account holders are getting the most out of the accounts, with the majority tapping these accounts for current medical expenses than investing for the future. More than 91% of Fidelity’s funded HSA accounts were only invested in cash.
Among people aged 75 years and over, out-of-pocket medical costs amounted to a fifth of total income, but it could become a problem for a larger share of retirees amid expectations for out-of-pocket heath costs to continue to grow faster than retirees’ income, according to a 2018 report by Matthew Rutledge and Geoffrey Sanzenbacher for the Center for Retirement Research. All the more reason for those trying to get ahead of health-care expenses to invest that money in something that can do better than the interest from cash.