Retiree health care costs rise to new high, study finds

Fidelity Investments recently shared its 23rd annual Retiree Health Care Cost Estimate, which reveals that a 65-year-old retiring this year can expect to spend an average of $165,000 in health care and medical expenses throughout retirement. Fidelity’s 2024 estimate is up nearly 5% over 2023 and has more than doubled from its inaugural estimate in 2002.

“Health care costs are among the most unpredictable expenses, especially when it comes to retirement planning,” said Robert Kennedy, SVP, workplace consulting, at Fidelity. “As we approach the fall open enrollment period for health care benefits, it’s a great time for Americans to be proactive with their financial planning efforts. The best time to plan for those health care costs is long before they occur.”

Designed to inform Americans about the importance of incorporating health care costs into retirement planning, this year’s estimate continues the decades-long upward trend of health care costs, the survey said. Despite this, there continues to be a disconnect for many Americans between the actual projected costs and how much they believe they will spend on health expenses in retirement, the survey said. In fact, recent Fidelity research finds the average American estimates costs will be about $75,000— less than half of Fidelity’s calculation.

“There is always opportunity to provide education around the cost of health care and the tools Americans have at their disposal to manage those expenses,” said Kennedy. “For Americans approaching retirement, understanding Medicare options and how they fit into your plan is a good first step.”

Fidelity’s estimate assumes that an individual is enrolled in traditional Medicare—both Part A and Part B—which covers most hospital care and doctor visits, and Part D, which covers prescription drugs. However, things like Medicare premiums, over-the-counter medications, dental and vision care, and all other health care costs that Medicare typically does not cover are left to retirees to manage on their own.

Planning for health care costs in retirement

Making a plan to cover health care costs in retirement can feel daunting, particularly as Americans balance competing priorities in day-to-day household budgets, the survey pointed out. There are a number of drivers behind this mounting retirement health care cost challenge: people are living longer, and health care inflation continues to outpace the rate of general inflation. As a result, it's no surprise that health care is creating a gap for many Americans.

The survey also pointed out there are simple steps investors can take to better prepare for future costs while managing today's expenses. These include exploring health savings accounts (HSAs), which give Americans enrolled in HSA-eligible health plans a tax-advantaged way to save for short- and long-term health expenses.

Helping retirees manage increasing costs

The rising costs of health care are, unfortunately, just something that happens as one ages, said MDRT member Brad Myers. “As we get older, our health often declines, causing us to seek more medical care,” he said. “This isn’t normally an area that pre-retires, or even those early in their retirement plan, think about until it happens. Many retirees are on a fixed income; so, the added costs can be a big concern down the line. “

Many retirees are dealing with added expenses for more minor concerns, Myers pointed out. However, for something more severe like a long-term care stay, their financial wellbeing may be at risk amid the already rising costs. “The retiree may not have the resources available to pay for additional costs, forcing them to make more difficult decisions. Some retirees rely on their children to care for them, but this can be a risk. Even if the children want to be able to take care of their parents, the children may not have the time or the resources to adequately care for them,” he said.

So, what can agents and advisors do to help their retired clients manage today’s spiraling healthcare and medical costs? They can do so through exceptional planning, Myers said. He would recommend that advisors ask a few simple questions. For example, he said, asking questions like: “What is your plan for your future health care and how are you going to pay for it?” will lead to necessary conversations that help the retiree and the advisor develop a plan based on that information.” In addition, Myers would recommend setting a portion of their retirement nest egg aside for these potential costs.

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