Second Opinion(s) on Health Cost ‘Coverage’

As if retirement savers didn’t have enough to worry about, last week a report reminded us how much money they’re going to need in retirement… just for health care.

In fact, Fidelity Investments’ 20th annual Retiree Health Care Cost Estimate claims that a 65-year-old, opposite-gender couple[i] retiring this year can expect to spend a whopping $300,000 in health care and medical expenses throughout retirement—an 88% increase since 2002. 

This year’s estimate is a new high, and even if it’s up just 1.7% from 2020 ($295,000), it’s 30% higher than 10 years ago when the amount was $230,000.

What Are the Odds?

Now, if you’re finding all that a bit depressing, you might turn instead to the work that the Employee Benefit Research Institute (EBRI) did a year ago, when the group examined those needs. However, they found that the overall projected savings needed to have a 90% chance of having enough money to pay for premiums, Part B deductibles and out-of-pocket drug expenses for retirement at age 65 in 2020 for a couple with drug expenses at the 90th percentile was then estimated at $325,000—that said, it was down from $363,000 in 2019 and $399,000 in 2018.[ii]

Not feeling any better? 

The ‘Spread’

Well, consider that for a typical 65-year-old woman, a Mercer-Vanguard model predicts an annual health care expense of (just) $5,200 in 2018. And then there is that interesting report from 2019 (aptly titled “A New Way to Calculate Retirement Health Care Costs”) by T. Rowe Price’s Sudipto Banerjee who suggested then (and presumably would again today) that it may be more practical to look at health care as an annual expense incurred over the 20-30 years you’ll actually incur those expenses, rather than as a lump sum. 

More recently, Banerjee points out another aspect of these large lump sum totals that is easy to overlook—and that’s the impact of “health care shocks”—those really high health care cost increases (say in excess of $25,000) that many worry about, but that don’t usually affect younger retirees.[iii]

Confused?

Well, even if you aren’t, you can surely understand why your “average” retirement saver might be. Worse, my guess is that the only takeaway most would get from all this is the first headline[iv]—that they’re going to need more for health care expenses in retirement alone than many have accumulated for the totality of their retirement expenses.

Ultimately, these types of projections serve to remind us that health care costs need to be contemplated as a part of retirement expenses—and that, at the extremes, those costs can quickly wipe out funds set aside for living expenses. Little wonder that concerns about the costs of health care in retirement dominate the concerns of those not yet across that threshold. 

But as you’re sharing these headlines with savers—doubtless hoping they’ll take it as a wake-up call, an incentive and an encouragement to plan, and perhaps to save more—we should keep in mind that those attention-grabbing lump sum numbers are, at best, an estimate that attempts to put a framework around a very specific aspect of retirement spending—one that for the vast majority won’t come due all at once, but over decades, one that may well not emerge until much later in retirement, one that may never ever arise in that projected magnitude. 

Bear in mind as well that, however eye-opening or jaw-dropping the headline, presented out of context it might have the opposite effect—discouraging and even disincentivizing the very behaviors we hope to inspire.

- Nevin E. Adams, JD

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[i] For single retirees, the 2021 estimate is $157,000 for women and $143,000 for men.

[ii] Fidelity’s estimates above assume both members of the couple are enrolled in traditional Medicare (which between Medicare Part A and Part B covers expenses such as hospital stays, doctor visits and services, physical therapy, lab tests and more), and in Medicare Part D, which covers prescription drugs. Neither includes the potential impact of long-term care costs, though EBRI routinely does in it modelling of retirement savings needs.

[iii] Indeed, not only does he write that they are more prevalent among those who reach their 80s and 90s, but that—even then—it’s (only) a very small percentage of people (3.6% of those ages 80-89, and 8.4% for those ages 90-99—however, overall, even for those between ages 90 and 99, less than one-third experienced an increase of more than $2,000, he notes).

[iv] To their credit, having gotten your attention with that headline, the press release accompanying it does offer a perspective on how that financial need could be satisfied taking advantage of a health savings account. Ahh, the magic of compounding!