Nurse caring for an elderly injured patient.
The projected cost of health care expenses in retirement continues to grow, yet a significant portion of Americans are unaware of the need to save for health expenses.
A 65-year-old retiring today can expect to spend $172,500 on health care and medical expenses during retirement. This represents a more than 4% increase year over year and continues an upward trajectory of projected health-related expenses since 2002, when the estimate was $80,000, according to Fidelity Investments' annual retiree health care cost estimate.
The largest share of medical expenses during retirement includes co-payments, coinsurance and deductibles for doctor and hospital visits. Close behind are Medicare Part B and Part D premiums. Out-of-pocket prescription drug costs account for about 9% of health care costs in retirement.
Many Americans underestimate how much they’ll need to save to cover health care costs. More than 1 in 5 Americans said they have never considered health care needs during retirement, and 17% have taken no action at all to prepare for these expenses, the report found.
The study points to health savings accounts as one tool pre-retirees can start now to prepare for the future, although it revealed an HSA knowledge gap, with only 15% of people between the ages of 55 and 64 having an HSA. More than half of those were not aware that an HSA can be used as a retirement savings vehicle.
Contributions to HSAs are pre-tax, and funds withdrawn to pay for qualified medical expenses are tax-free. In addition, any growth in invested HSA funds is considered tax-free. These tax advantages can help reduce the burden of health care costs that retirees encounter.
“Our research consistently shows HSA users feel more prepared to cover health care expenses in retirement, yet many people don’t realize the full potential of the account,” said Steve Betts, head of Fidelity Health.
HSA adoption rates continue to increase, the study noted. Fidelity HSAs saw 43% growth in total assets and a 23% increase in accounts last year. Still, there is plenty of room to educate employees about HSA features, Fidelity said. Less than one-quarter of Americans are contributing to an HSA to prepare for health care costs in retirement, and only 30% are investing their HSA funds.
In addition, Americans may be overestimating how much Medicare will help with expenses. Thirty-seven percent of Americans said they plan to rely on Medicare to cover health care costs in retirement, but many are unaware that they will still be responsible for premiums, over-the-counter medications, dental and vision care, and long-term care.
Further, more than half of Americans believe the process of enrolling in Medicare will be difficult, and they expect to be confused when selecting a plan, the Fidelity study found.
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