Health Care Costs Top Retiree Fear List

A vast majority of Americans report they are worried about health care costs in retirement, but many still substantially underestimate what the expense may be.

Fidelity Investments’ recent “Retirement Savings Assessment” survey finds Americans are increasingly concerned about health care costs in retirement, with 84% of respondents saying they are unsure whether they will be able to cover medical expenses through retirement.

Fidelity warns the problem may be even greater than such figures suggest, as almost three-fourths (71%) of respondents expect to have better-than-average health in retirement—an overly optimistic assumption for many, since the Centers for Disease Control and Prevention (CDC) reports that 35% of U.S. adults are considered obese, and only 20% meet the centers’ overall physical activity recommendations.

Another troubling result from the survey shows nearly half of pre-retirees ages 55 to 64 believe they will need about $50,000 to pay for their individual health care costs in retirement, while Fidelity’s annual Retiree Health Care Cost Estimate, which benchmarks the projected cost of health care in retirement, found that the average couple can expect to spend more than $220,000 in health care expenses over the course of their retirement. In contrast, Fidelity finds the average participant balance in 401(k) plans for which it serves as recordkeeper is about $89,300.

In addition to underestimating health care costs, many workers are unaware of the long-term financial impact that making positive health decisions can have. When asked which type of resolution is more important to keep—financial or physical—a little more than half (53%) of respondents said they would prefer to keep financial fitness resolutions, compared with 43% who opted for physical fitness. However, many do not realize the significant connection between the two, Fidelity says, and the importance of focusing on both health and finances when it comes to managing health care costs in retirement.

“Making smarter decisions about your health means you’re making smarter financial decisions, particularly when it comes to retirement,” explains John Sweeney, executive vice president of retirement and investing strategies at Fidelity.

Sweeney says those who are in good health tend to be more active in retirement and are able to spend more of their accumulated assets on discretionary expenses, such as travel. He says the survey also makes it clear that staying healthy is one of the most powerful ways to reduce essential costs in retirement, as retirees will not have to spend money on persisting medical expenses or long-term care.

“Simply put, not only can an apple a day keep the doctor away, it can very well help protect your retirement nest egg, too,” Sweeney says.  

Fidelity gives a fairly bleak assessment of what these results mean for workers’ chances of achieving a comfortable and secure retirement. With longer life spans, medical costs rising faster than general inflation, declining retiree medical coverage by private employers and funding challenges for Medicare and Medicaid, managing health care costs is expected to remain a critical challenge for retirees for some time to come. That is why the importance of maintaining a healthy lifestyle cannot be understated, Fidelity says.

The firm estimates an unhealthy individual with a pre-retirement income of approximately $80,000 may need an income replacement ratio as high as 96%, or approximately $76,800 per year, to meet his health care expenses. Conversely, if that same person were in excellent health, he might need just 77% of pre-retirement income to maintain the same standard of living. In other words, good health can cut nearly 20% from income needs during retirement.

To help plan for retirement health care costs, Fidelity suggests the following:

  • If possible, increase your savings level. Set an annual total savings goal of 10% to 15% or more of income, including both individual and employer contributions. Also, workers should consider investing a portion of any raises, bonuses or tax refunds into retirement savings.
  • Make saving automatic. Workers who cannot reach the 10% to 15% threshold immediately should consider increasing their contributions to savings plans by 1% every year to reach this goal, either manually or through automatic escalation features included in many plans.
  • Contribute to a health savings account (HSA). Individuals who are offered a qualifying high-deductible health plan (HDHP) through their employer should also consider saving in a health savings account. HSAs offer a “triple tax advantage,” Fidelity says, meaning contributions and investment earnings accumulate tax-free and continue to roll over from year to year if not spent. Distributions from HSAs for qualified medical expenses are not subject to federal taxes.

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