For many Americans, health care is likely to be among their largest expenses in retirement. For example, a 65-year-old couple retiring in 2012 is estimated to need $240,000 to cover medical expenses throughout retirement—a 4 percent increase from 2011, when the estimate was $230,000—according to the annual retiree health care costs estimate calculated by Fidelity Investments.
The estimate assumes no employer-provided retiree health care coverage and life expectancies of 17 years for men and 20 years for women. It applies to retirees with traditional Medicare insurance coverage and does not include health-related expenses for over-the-counter medications, most dental services and long-term care.
The estimate has increased an average of 6 percent annually since Fidelity’s initial calculation of $160,000 in 2002, with the exception of 2011 when the estimate declined $20,000. That only decrease in the history of the estimate is attributed to a one-time adjustment driven by Medicare changes that reduced out-of-pocket expenses for prescription drugs for many seniors. In 2012, health care expenses are rising once again.
“Today’s workers must understand that the cost of health care is expected to continue rising significantly in future years,” said Brad Kimler, executive vice president of Fidelity’s benefits consulting business. “Medical inflation is outpacing salary increases and cost-of-living adjustments for many people. Until that situation changes, it is critical that individuals include health care costs in their retirement savings strategies today so they can be prepared to pay their medical bills throughout retirement,” Kimler advised.
Retirees Should Adjust Expectations
Many retirees rely on Social Security benefits as their primary source of income. For a 65-year-old couple retiring in 2012 on a $75,000 annual household income, annual Social Security payments will be about $29,970.
Fidelity compared Social Security’s average cost-of-living adjustment (2.3 percent) against an assumed average annual increase of health care costs for retirees nationally (6 percent). The comparison found that the 65-year-old couple above should expect that 35 percent of their annual benefit (about $10,476) could be needed for health care expenses. By 2027, their allocation of Social Security benefits going to health care expenses is likely to almost double to 61 percent of a $41,205 annual Social Security payment, or about $25,000 a year.
“Retirees relying entirely on Social Security to fund their health care costs will be faced with difficult challenges in the future,” said Kimler. “Today’s workers should plan to supplement their retirement income to cover their medical expenses. It is never too late to begin utilizing all retirement savings vehicles available, including any 401(k) accounts, IRAs and health savings accounts, to help build a more secure retirement.”
Using HSAs to Save
In an effort to help ensure working Americans are prepared for retirement, many companies have adopted high-deductible health plans (HDHPs) that have lower premiums for participants and employers than traditional health plans. Participation in HDHPs qualifies users to establish health savings accounts (HSAs), which allow individuals to pay for qualified medical expenses on a federal tax-free basis. The savings can be used to pay for current qualified medical expenses, or participants can accumulate their savings and use the money to pay for qualified medical expenses in retirement. In addition, the accounts are portable for individuals who change employers.
In 2011, the maximum allowable contribution to an individual HSA was $3,050 (plus an additional $1,000 for those age 55 and older). On an annual basis, Fidelity reports that for the HSAs it administers, account holders contributed an average of $2,677 in 2011.
Adopting a Culture of Health and Savings
In addition to promoting retirement savings, employers can help their workers manage health care expenses in retirement by encouraging a healthy lifestyle during their working years. A Fidelity employer survey conducted Nov. 16-Dec. 12, 2011, found that most U.S. employers (90 percent) believe that there is some connection between financial security and personal health. However, less than half (46 percent) of the companies surveyed said they had established a culture of health and savings in the workplace.
“It is important for employers to be committed to both health and wealth initiatives for their workers,” said Kimler. “A coordinated effort that integrates health benefits programs with retirement plans may be the best approach.”
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Social Security Statements Now Available Online, SHRM Online Benefits Discipline, May 2012
Culture of Saving: HSA Participants Save More in Their 401(k)s, SHRM Online Benefits Discipline, August 2011
Financial Stress Contributing to Productivity Loss, SHRM Online Benefits Discipline, April 2010
Health Savings Accounts Can Build Retirement Wealth, SHRM Online Benefits Discipline, October 2010
SHRM Online Benefits Discipline
SHRM Online Retirement Plans Resource Page
SHRM Online Health Care Reform Resource Page