Retiree Health-Care Costs Rise to a Cool Quarter Million

Fidelity's estimate jumps from $220,000 to $245,000 for 2015.

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Photographer: Getty Images

The average 65-year-old couple retiring this year will face health-care costs of $245,000 in the years ahead, up 11 percent from a 2014 estimate of $220,000, according to a new report. 

That's alarming if you're 65, and maybe more alarming if you're 25 — imagine what the cost will be when you're ready to retire. (It also offers an incentive to work at staying healthy as you age. More advice for the young below.)   

The higher number stems in part from a change in assumptions about how long we'll live. In the wake of updated mortality tables put out by the Society of Actuaries last year, Fidelity Investments raised life expectancies in its annual Retiree Health Care Cost Estimate. For 2015, it assumes that a 65-year-old man will live to 85, and a 65-year-old woman to 87. In 2014, the estimate was 82 for a man and 85 for a woman. 

The estimated annual increase in medical and prescription expenses stands at 4 percent to 5 percent, about the same as last year. Prescription costs are trending higher than medical, at slightly above 7 percent, said Sunit Patel, senior vice president of Fidelity's Benefits Consulting group. Prescription drug costs account for 23 percent of that $245,000 figure. Money spent on deductibles and cost-sharing with an insurer make up 43 percent, and 34 percent goes to Medicare Part B and D premiums.

Fidelity's calculation assumes the couple is enrolled in Medicare health coverage and has bought supplemental (Medigap) insurance. Dental isn't included (and can be very expensive), nor is one big, scary chunk of potential costs—long-term care.

Large as it is, Fidelity's $245,000 estimate is lower than a projection of health-care costs in retirement released by HealthView Services earlier this year.1 HealthView worked with an actuarial firm to come up with life expectancies only for healthy 65-year-old couples. That bumps up the life expectancies to 87 for a man and 89 for a woman. 

You'd think the estimated costs for a healthy couple might be lower, but the surveys use different assumptions, so there's no apples-to-apples comparison to be made. HealthView's estimate for a fit 65-year-old couple retiring this year is $266,589. When dental, vision, co-pays, and all out-of-pocket expenses are included, the tally rises to $394,954. 

There are ways consumers can try to defray some health-care costs in retirement. As more workers are put into high-deductible health-care plans, they often gain access to tax-advantaged health savings accounts (HSAs). These can help cover medical expenses in retirement, particularly if you open one when you're young and its earnings compound, tax-free, for decades. With HSAs, you can roll over to the next year any unused money you set aside, pre-tax, to cover health expenses. That's different from a flexible spending account (FSA); if you don't use that money in a given year, you lose it.

Another way to have more income in retirement is to maximize your Social Security benefits2. If you're able to wait to tap benefits till age 70, you'll get the largest benefit, one that may be 76 percent higher than if you had filed when you were first able to, at 62. Knowing the smartest way to claim Social Security benefits can pay big, inflation-adjusted benefits in the future. 

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  1. 1 HealthView Services bases its projection on "50 million actual health-care cases and a wide range of additional data sources." The company's data and applications are used by financial advisers to estimate health-care costs in retirement for clients.
  2. 2 Get What's Yours, by Laurence Kotlikoff, Philip Moeller, and Paul Solman, is a sophisticated yet readable book that lays out many farsighted benefits-claiming strategies, whether you're single, married, widowed, or divorced.