Planning for health care expenses is a critical yet often underestimated aspect of retirement. Fidelity Investments’ latest Retiree Health Care Cost Estimate reveals that a 65-year-old retiring today will spend an average of $165,000 on medical expenses throughout retirement—a staggering figure that has more than doubled since the estimate began in 2002.
Why Are Health Care Costs So High?
Health care costs have risen consistently due to longer life expectancies and health care inflation, which often outpaces general inflation. Fidelity’s 2024 estimate marks a 5% increase from 2023 and highlights the ongoing upward trend that retirees must account for in their financial planning.
Americans Drastically Underestimate Health Care Expenses
While Fidelity estimates a 65-year-old retiree will spend $165,000 on medical costs, the average American guesses they will only need $75,000—less than half the actual amount. This disconnect emphasizes the need for education and proactive planning.
The Role of Medicare in Retirement Health Care Costs
Fidelity’s estimate assumes retirees enroll in traditional Medicare (Parts A, B, and D), covering hospital stays, doctor visits, and prescription drugs. However, out-of-pocket expenses like dental, vision, and over-the-counter medications are not included, leaving retirees to manage these costs independently.
The Complexity of Medicare Enrollment
Navigating Medicare isn’t as straightforward as many assume. In fact, 55% of Americans approaching retirement say they expect challenges in selecting a Medicare plan, and 50% anticipate feeling overwhelmed or confused during the process.
There are significant fines if one does not sign up for Medicare at the appropriate time.
Selecting either an Advantage Plan or Traditional Medicare is often confusing. Many Americans are familiar with traditional healthcare insurance provided through their employers where one can switch between plans every year (during open enrollment) or life changing events.
Unfortunately there are rules with Medicare which could lock a retiree into a plan and not permit switching between plans
The Importance of Annual Medicare Reviews
While 63% of older Americans plan to review their Medicare coverage annually, those over 75 are least likely to do so, despite changing health needs. Regular reviews can ensure retirees have the most appropriate and cost-effective coverage for their situation.
Understanding Health Savings Accounts (HSAs)
Health Savings Accounts (HSAs) are a tax-advantaged way for Americans with HSA-eligible plans to save for both immediate and long-term medical expenses. Contributing to an HSA can be a strategic move to offset retirement health care costs.
A health savings account (HSA) is an account that can help individuals and families save money for qualified health care expenses on a pre-tax basis. Everyone does not have access to Health savings accounts.
To qualify for an account, you must be enrolled in a high deductible health plan (HDHP). And not all high deductible health plans are health savings account HSA qualified. It has to be defined by the Internal Revenue Service to be an HDHP.
The Internal Revenue Service (IRS) defines an HDHP as a plan with a higher deductible than the typical individual health insurance plans and a maximum out-of-pocket limit that includes deductibles, coinsurance, and copays.
Related Article: Learn more about HSAs
Why Health Care Costs Are a Growing Retirement Concern
For many retirees, health care is becoming one of the most unpredictable expenses. The combination of increasing costs, longer lifespans, and limited knowledge about Medicare options has created a significant financial gap for many Americans.
Medicare Trust Funds Running Out
There has been a decline in worker confidence regarding Medicare, with just half feeling somewhat confident it will continue to provide benefits of equal value to those received today.
The Hospital Insurance fund for Medicare Part A is expected to be able to fully pay scheduled benefits until 2036, five years longer than last year’s projection, according to a recently released report.
When the trust fund is depleted, program tax income is expected to be sufficient to pay 89% of projected benefits.
Trustees for Social Security revised their projections based on updated inflation and economic output data.
The Psychological Impact of Rising Costs
The survey found that 50% of Americans nearing retirement feel anxious about choosing Medicare plans. This stress underscores the importance of accessible guidance and tools for navigating health care decisions.
While many Americans understand the importance of preparing for health care costs, competing financial priorities often take precedence. This makes long-term planning even more critical.
Key Takeaways for Pre-Retirees
Start planning early: The earlier you begin saving, the better equipped you’ll be to handle rising health care costs.
Educate yourself: Familiarize yourself with Medicare and supplemental insurance options.
Use expert guidance: Understand what is covered, what isn’t, and how supplemental insurance might help.
Start saving early: Begin setting aside funds specifically for health care, either in an HSA or other savings vehicles.
Plan for out-of-pocket costs: Account for dental, vision, and other medical expenses not covered by Medicare.
Review annually: Reassess Medicare and health care plans each year to ensure they align with changing health needs.
Looking Ahead: Retirement Health Care in a Changing Landscape
With health care inflation continuing to rise, retirees and those approaching retirement must take proactive steps to prepare. By understanding costs, exploring tools like HSAs, and leveraging expert resources, Americans can navigate this complex landscape with confidence.
Retirees also need to keep an eye on proposals to fix Medicare. With funds expected to run out in a decade there is limited time for Congress to act.
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While many envision tax-friendly golden years, residents in ten states face a harsh reality as their Social Security benefits are taxed. In contrast, two states are offering relief by ending their practice of taxing these benefits. And one state has a phased implementation to end taxation of Social Security benefits. This shift highlights the complexities of retirement planning in the U.S. and underscores the importance of staying informed about changing tax laws. Are you living in one of these states? Discover how these tax changes might impact your retirement strategy and whether it’s time to reconsider your locale for those serene post-work years.
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John Dealbreuin came from a third world country to the US with only $1,000 not knowing anyone; guided by an immigrant dream. In 12 years, he achieved his retirement number.
He started Financial Freedom Countdown to help everyone think differently about their financial challenges and live their best lives. John resides in the San Francisco Bay Area enjoying nature trails and weight training.
Here are his recommended tools
Personal Capital: This is a free tool John uses to track his net worth on a regular basis and as a retirement planner. It also alerts him wrt hidden fees and has a budget tracker included.
Platforms like Yieldstreet provide investment options in art, legal, real estate, structured notes, venture capital, etc. They also have fixed-income portfolios spread across multiple asset classes with a single investment with low minimums of $10,000.
