According to research from the Fidelity Investments Retirement Savings Assessment study, 84 percent of respondents wonder whether they will be able to afford health care in retirement, but 71 percent expect to have better-than-average health in retirement, an overly optimistic assumption for many, the report found.
Many Americans greatly underestimate the amount of savings they may need to cover health care costs in retirement. A study last year of pre-retirees (ages 55-64) found that nearly half of respondents believe they will need about $50,000 to pay for their individual health care costs in retirement. Fidelity’s annual Retiree Health Care Cost Estimate, which has estimated the cost of healthcare in retirement every year for more than a decade, has found that the average couple could expect to spend more than $220,000 in healthcare expenses over the course of their retirement.
Many individuals don’t understand the long-term financial impact that making positive health decisions can have. When asked which resolution is more important to keep—financial or physical fitness—a recent Fidelity study revealed that 53 percent of respondents prefer to keep financial fitness resolutions, compared to 43 percent opting for physical fitness. They don’t realize the significant connection between the two—and the importance of focusing on both—especially when it comes to health care costs in retirement.
“Making smarter decisions about your health means you’re making smarter financial decisions, particularly when it comes to retirement,” said John Sweeney, executive vice president of Retirement and Investing Strategies at Fidelity. “Being in good health will probably mean you’ll be more active in retirement—and you’ll likely be able to spend more on discretionary expenses such as travel. It’s also clear that doing all you can to stay healthy can make a big difference on essential costs as well, because you won’t have to spend that money on medical expenses. Simply put, not only can an apple a day keep the doctor away, it can very well help protect your retirement nest egg, too.” With longer life spans, medical costs rising faster than general inflation, declining retiree medical coverage by private employers and funding challenges for Medicare and Medicaid, managing health care costs is expected to remain a critical challenge for retirees for some time to come. That’s why the importance of maintaining a healthy lifestyle cannot be understated.
Fidelity estimates an individual with a pre-retirement income of $80,000 who is in poor health may need an income replacement ratio as high as 96 percent of his or her pre-retirement income each year, or about $76,800. Conversely, that same person in excellent health might need just 77 percent, or $61,600, a nearly 20 percent difference.
To better prepare for retirement healthcare costs, Fidelity suggests:
• Increasing your savings level. Set an annual total savings goal of 10-15 percent or more of your income (including individual and employer contributions). Contributing the appropriate amount to a retirement savings account is a key aspect of reaching your savings goals, whether through a workplace savings account, such as a 401(k) or 403(b), or an Individual Retirement Account (IRA), or both. Also, consider investing a portion of any raises, bonuses or tax refunds into savings and increasing contributions to savings plans by 1 percent every year to reach this goal.
• Make saving automatic. Think about putting savings on autopilot by signing up for automatic withdrawal plans through your financial services provider, or turning on the automatic increase program in your 401(k), if offered.
• Contribute to a health savings account (HSA). Individuals who are offered a qualifying high-deductible health plan through their employer should also consider saving in a health savings account. HSAs offer a “triple tax advantage,” meaning contributions and investment earnings accumulate tax-free and continue to roll over from year to year if not spent. Distributions from HSAs for qualified medical expenses are not subject to federal taxes. Take advantage of all available company contributions to cover out-of-pocket health care costs, and invest any remaining balances for future qualified medical costs, including those in retirement.
Fidelity Investments is one of the world’s largest providers of financial services, with assets under administration of $4.7 trillion, including managed assets of $2.0 trillion, as of February 28, 2014.