Retirement Timing Affects Estimated Health Care Costs

However, this year’s Retiree Health Care Cost Estimate shows couples can reduce the cost by delaying retirement just a couple of years.

A recent survey by Fidelity found pre-retirees plan to retire at an average age of 65. But, recently retired respondents said they retired at age 62 on average, sometimes due to health issues or physical limitations. This gap, says Fidelity, points to a growing reality for many individuals and couples who are at risk of facing far greater health care costs in retirement than anticipated.

In response, Fidelity estimated the possible extra health care costs for couples who start their retirement at age 62, as well as potential savings for those who can delay it until age 67. Similar to the decision pre-retirees make about when to start claiming Social Security, health care costs need to be factored in to the retirement timing decision, says Fidelity. For couples who opt to retire at age 62, they can anticipate an additional estimated cost of $17,000 per year. The extra costs are health insurance premiums for this period prior to Medicare eligibility and estimated out-of-pocket costs. On the other hand, the potential annual cost reduction for couples who can delay retirement until age 67 could be $10,000 per year.

“Rising health care expenses are forcing people to make educated decisions now more than ever, ranging from the services they utilize to the age at which they choose to retire,” says Brad Kimler, executive vice president of Fidelity’s Benefits Consulting business, based in Boston. “We understand some people don’t have a choice in when they retire. Sometimes health issues or someone’s occupation play a role. So it’s critical that people plan well in advance for the considerable cost of health care by adding it into their overall retirement planning discussions.”

While recognizing that health care costs in retirement are significant, Fidelity also notes that such costs have moderated over the last few years. The 2014 Retiree Health Care Cost Estimate produced the same figure as last year’s estimated health care expenses (see “Retirees Will Need Almost Quarter Million for Health Care”). Fidelity notes the estimate does not include the added expenses of nursing home or long-term care and assumes traditional Medicare coverage.

Factors that led to the moderation of health care costs include:

• Long-term prescription drug savings due to the gradual closure of Medicare Part D’s “donut hole,” leaving retirees with a reduced, 25% co-insurance cost by 2020, whereas previously there was no coverage at all;
• The trend of slower Medicare spending per enrollee through 2022, as projected by the U.S. Department of Health & Human Services; and
• An increasingly cautious and selective health care consumer, with ongoing economic uncertainty leading to reduced utilization of discretionary health care services, such as elective surgeries.

Kimler recommends both couples and single individuals seek out guidance about how to transition into retirement, especially when it comes to planning for health care expenses. Topics to be covered in such guidance should include:

• Comprehensive retiree income solutions;
• How and when to begin claiming Social Security payments;
• Finding private insurance options on the exchange marketplace;
• Navigating the Medicare exchange environment; and
• Understanding how to select Medicare Advantage and Medicare Supplemental plans.

In an effort to help both companies and employees reduce health care expenses, Fidelity suggests companies offer high-deductible health plans (HDHP) combined with health savings accounts (HSAs). Similar to how workplace retirement savings plans such as 401(k)s provide tax-advantaged savings, HSAs offer tax-advantaged opportunities to save for qualified medical expenses both today and in retirement.