For many, generating $250,000 in savings seems like quite a far off dream, but Fidelity’s Retirement Health Care Cost Estimate study now projects Americans will need just about that much to pay for health care in retirement.
According to Fidelity, a healthy couple retiring this year at age 65 should expect to spend $245,000 on health care throughout retirement, up from $220,000 last year. The figure has increased 29% since 2005, Fidelity says, when the projection was a cool $190,000.
As in earlier years, Fidelity finds factors boosting this year’s estimate include longer life expectancies and anticipated annual increases for medical and prescription expenses. In reality the picture is probably even tougher for retirement savers, as the estimates assume enrollment in Medicare health coverage but do not include the likely expenses for nursing home or other forms of long-term care.
“The sticker shock of $245,000 hopefully reinforces for many people that they need to act now, regardless of their age,” says Brad Kimler, executive vice president of Fidelity’s Benefits Consulting Services. “For people offered a high-deductible health plan with a health savings account at work, choosing this option can really help them prepare, especially for Millennials who have a long time to save.”
Like other retirement plan and investment providers, Fidelity advocates that pre-retirees evaluate retirement health insurance options and health expense funding vehicles well in advance of actually leaving the workforce. People may look at their options and consider private Medicare Advantage programs available in their area, which Fidelity says could reduce couples’ overall costs in many cases.
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Equally important, says Sunit Patel, senior vice president, benefits consulting, Fidelity Investments, is for people to understand that these numbers really do apply to them. A given couple may pay more or less than $240,000 for health care in retirement, but even for those who stay healthiest longest, the cost of care really does add up near the end of life. In other words, living longer and living healthier do not bring lower net expenses.
“The numbers are daunting, absolutely,” he says. “At a high level, most Americans aren’t fully aware of what this $245,000 number means. They understand health care is expensive but they think more support will be available than they are actually likely to get, whether through Medicare or through staying at work longer.”
Especially for younger workers, Patel tells PLANADVISER, funding a health savings account (HSA) through regular contributions can be a highly effective way to meet such a daunting savings hurdle. For many in lower wage industries, decades of regular savings in a tax-sheltered HSA is one of the few imaginable ways of hitting this goal.
Along those lines, Fidelity says most working Americans could benefit by opening an HSA to save for qualified health care expenses today and in retirement, due to the oft-cited “triple tax benefit” associated with the accounts. As Patel notes, HSA contributions generally are deferred pre-tax, accrue interest free of taxes, and finally are spent on qualified services free of taxes.
“For plan sponsors and advisers, one concrete step is to educate retirement plan participants that contributions into an HSA not spent in a given year will carry-over and can be invested for greater growth,” Patel says. In the past there has been an association of HSAs with accounts that are not permitted to roll from year to year.
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In Fidelity’s related 2015 Couples Retirement Study, nearly three-fourths of couples surveyed said being able to afford unexpected health care costs in retirement was their top concern. Yet, only one in five couples had factored health care costs into a concrete financial plan. Patel agrees this highlights an opportunity for service providers to come together with benefit plan sponsors to improve the clarity of thinking around retirement health care costs.
“It’s always going to be an individualized decision when to open an HSA—it’s an individual decision that depends on what the purchaser is looking for at a given time,” Patel continues. “In general, we can say HSAs provide tremendous value over time and the benefit of being able to shelter a significant amount of money from taxation and having it grow over 10, 20 or even 30 years. It’s a tremendous financial opportunity for people who can only afford to save a little more each month.”
Looking to the year ahead, Patel concludes a big rush of HSA adoption will come along as the much-maligned “ACA Cadillac Tax” looms closer and closer—unless ongoing Congressional action is successful in altering or paring back the tax. The excise tax, which will be assessed on the most expensive health plans, is effective for taxable years beginning in 2018, so it is likely that any excise tax owed based on the 2018 tax year will be payable in 2019.
“We are confident that if Cadillac Tax doesn’t change, there will be very heavy migration towards HSA-based health plans,” Patel concludes. “That’s one of the primary approaches to stay below the excise tax threshold. For participants this means less in premiums but more in deductibles and more out of pocket. It’s the wave of the future.”