This estimate is for a 65-year-old couple, retiring in 2013, and represents an 8% decrease from last year’s estimate of $240,000 (see “Health Care Costs Could Consume Retiree’s Income”). The figure does not include any costs associated with nursing home care and applies to retirees with traditional Medicare insurance coverage.
Fidelity has calculated an annual estimate of health care expenses for retirees since 2002, with the estimate increasing an average of 6% annually between 2002 and 2012. It decreased only once before – in 2011 – due to a one-time adjustment driven by Medicare changes that reduced out-of-pocket expenses for prescription drugs for many seniors. The estimate decreased for the second time in 2013 due to lower than expected Medicare spending in recent years, as well as a reduction in projected Medicare spending in the near future.
“While lower, this year’s estimate is still daunting for many retirees, and it will consume a considerable amount of a couple’s retirement savings,” said Brad Kimler, executive vice president of Fidelity’s Benefits Consulting business. “It is extremely important that health care costs are factored into retirement savings strategies today so that retirees can be prepared to pay their medical bills throughout retirement.”
According to Fidelity research, Medicare per enrollee spending increased at a rate of only 0.4% in 2012, in line with relatively small increases in spending in recent years. Specifically, spending per enrollee rose just 1.9% between 2010 and 2012. This is lower than historical increases, which have averaged 7% annually from 1985 to 2009.
A number of factors likely contributed to the recent trend of decreasing spending per enrollee, said Kimler. The economic downturn that began in 2008 led to a decrease in utilization of health care services as many Americans were faced with financial challenges. Also contributing were smaller payment increases to providers (e.g., hospitals, physicians, health plans). Additionally, as Baby Boomers retire, they bring a large influx of younger enrollees into the Medicare population, reducing the overall average age of participants. Younger retirees tend to have lower health care expenses than older beneficiaries, which also contributed to the lower per-enrollee spending.
Though spending per enrollee has declined, Kimler added that it is important to note that increases in aggregate Medicare spending have grown at a faster rate due to a larger number of beneficiaries. While lower spending per enrollee has had a positive impact on Medicare costs right now, the growth in Medicare enrollees over the next few years is expected to continue to strain Medicare-related resources.
“What is surprising is that while the economy has strengthened, per-enrollee trends remain modest compared to historical rates,” continued Kimler. “Whether these trends are sustainable depends largely on the ability of the private health sector to find efficiencies in the delivery system.”
Recent Fidelity research also suggests that many people underestimate the amount they will need to cover health care expenses during retirement. While Fidelity’s annual retiree health care cost estimate has exceeded $200,000 every year since 2006, a recent poll of preretirees (ages 55 to 64) found that 48% believe they will only need $50,000 to pay for health care costs throughout their entire retirement. While some Americans will have employer-sponsored retiree health benefits to help cover these expenses, the majority of Americans will need to plan to cover health care costs as part of their overall retirement savings strategy.
Kimler recommended exploring options for covering retiree health care costs and identify the savings vehicle that fits with their strategy, citing examples such as a health savings account (HSA), or an annuity or some other type of retirement income product.
“Creating a plan and starting to save as early as possible are two key aspects of a successful retirement savings plan,” he said. “But it’s also important to identify a specific retirement income stream to address health care costs in retirement. Having assets that are earmarked for health care expenses will help ensure retirees can cover these costs when they arise, as well as help manage their overall retirement savings portfolio.”
More information about planning for retiree health care costs, including the recent estimates, can be found on the Fidelity website.