Retiree health care cost estimates over time. Source: Fidelity Retiree health care cost estimates over time. Source: Fidelity

It is not news that U.S. health care costs eat up a big chunk of Americans’ financial resources. For a 65-year-old couple who retire this year, that means they will need an estimated $280,000 to pay for health care and medical expenses throughout retirement, Fidelity Investments reported Thursday.

This figure represents a 2% increase over the estimate for a similar couple in 2017, and a 75% increase from Fidelity’s initial 2002 estimate of $160,000.

Fidelity said its estimate was designed to calculate health care expenses for a traditional couple that retire at 65 and assumes that both partners are eligible for Medicare.

However, many individuals retire for various reasons before they reach 65, and a lot of these have to come up with hefty monthly sums to pay for health care premiums.

Retiring at 65

Fidelity noted many of the metrics that contribute to its annual retiree health care cost estimate were susceptible to shifts in the economic landscape and changes in government regulations.

The report said the 2% increase to this year’s estimate was the smallest annual increase since 2014, indicating that a number of the factors in its estimate, such as prescription out-of-pocket drug expenses and Medicare premiums, remained relatively flat over the last year.

According to Fidelity, the moderation of estimated retiree health care costs coincided with increasing savings levels for many Americans — an increase of nearly 10% in the average savings rate since 2013, according to an analysis of 401(k) accounts managed by the firm.

For individuals retiring this year, based on the same assumptions and life expectancies used to calculate the estimate for a 65-year-old couple, a man will need $133,000 to cover health care costs in retirement, while women will need $147,000, mainly because women are expected to live longer than men, according to the report.

“Despite this year’s estimate remaining relatively flat, covering health care costs remains one of the most significant, yet unpredictable, aspects of retirement planning,” Shams Talib, head of Fidelity Benefits Consulting, said in a statement.

“It’s important for individuals to educate themselves and take steps while working to ensure they are prepared to address these costs. Otherwise, people risk having to dip into more of their savings than originally anticipated, potentially impacting their overall retirement lifestyle.”

Early Retirement

Some individuals voluntarily retire before they reach 65. Others do so because of health issues or a work-related event.

In November, Fidelity surveyed 1,003 individuals between the ages of 50 and 64 who had retired within the last three years about how they planned to cover health care expenses until they are eligible for Medicare and how much they thought they would spend on health care in retirement.

Fifty-six percent of respondents said they had retired earlier than expected, and 30% said a health event that affected the individual or his or her spouse had prompted them to do so.

Nearly all respondents reported that they had some form of health care coverage that would tide them over until they were eligible for Medicare, but 36% said health care premiums were costing them $500 per month or more.

Asked how they were paying for out-of-pocket premiums, co-pays and deductibles associated with insurance coverage, 49% of early retirees said they were dipping into personal savings to cover these expenses.

Twenty-four percent said they were relying on Social Security income and 15% on retirement savings. Only 14% of respondents were using a health savings account to cover these costs.

Fidelity said that faced with these additional costs, many early retirees could be underestimating what they may need to cover health care in retirement.

Nearly half of respondents estimated that they would need less than $100,000 for health care costs in retirement, while another third admitted to not having any idea of what their expenses could be.

Talib said those faced with the prospect of early retirement needed to find out the options available to bridge the gap to Medicare eligibility to help pay for the extra health care expenses they were likely to incur during this period.

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