Most Underestimate Health Care Cost Needs In Retirement

Most individuals underestimate the amount of money needed for health care expenses in retirement, according to three recent studies.

Fidelity Investments. A 65-year-old couple retiring in 2013 is estimated to need $220,000 to cover medical expenses throughout retirement, according to the Fidelity Investments. Fidelity noted that this is an 8 percent decrease from last year’s estimate of $240,000.

Fidelity’s estimate had increased an average of 6 percent annually between 2002 and 2012. It decreased only once before—in 2011—due to a one-time adjustment driven by Medicare changes that reduced out-of-pocket expenses for prescription drugs for many seniors. The estimate has decreased for the second time in 2013 due to lower than expected Medicare spending in recent years, as well as a reduction in projected Medicare spending in the near future.

“While lower, this year’s estimate is still daunting for many retirees, and it will consume a considerable amount of a couple’s retirement savings,” said Brad Kimler, executive vice president of Fidelity Benefits Consulting. “It is extremely important that health care costs are factored into retirement savings strategies today so that retirees can be prepared to pay their medical bills throughout retirement.”

Fidelity also found that many consumers greatly underestimate the amount of savings they may need to cover health care costs in retirement. While Fidelity’s annual retiree health care cost estimate has exceeded $200,000 every year since 2006, a recent poll of pre-retirees (ages 55-64) found that nearly half (48 percent) of respondents believe they will only need $50,000 to pay for health care costs in retirement, the company noted.

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Aviva USA and Mayo Clinic. Nine out of ten individuals expect to spend less than 20 percent of their monthly retirement income on medical and dental expenses, according to recent research from Aviva USA and Mayo Clinic. In addition, seven out of ten expect to spend just 10 percent or less. In reality, people should be prepared to spend approximately 30 percent of their income on health care expenses in retirement, according to research from The Urban Institute.

“These are staggering discrepancies between people’s perception and current reality,” said Philip Hagen, medical director of Mayo Clinic EmbodyHealth and vice chair of the division of preventive and occupational medicine at Mayo Clinic. “This survey revealed most Americans are unrealistic about some of the repercussions of lifestyle choices and aging—specifically, that as you get older, your health is apt to decline and your need for health care increases. That need for additional care also means there will be additional costs. Getting regular preventive care and improving lifestyle habits to decrease health risks can help reduce these expenses and improve health and quality of life.”

Many people seem ill-prepared for the expense, the survey noted. Only four of ten people surveyed said they are, or will be, financially prepared for retirement. According to Aviva, that statistic becomes even more concerning when factoring in how much people underestimate health care expenses in retirement, and that the cost of health care continues to rise.

The survey contains responses from 1,500 nonretired U.S. adults. For more information, visit

Health Care Cost Institute. A recent study from the Health Care Cost Institute, Health Care Costs from Birth to Death, evaluating the impact of aging on health care costs from birth until very old age determined that the average 55-year-old retiree will spend $226,000 more on health care than a person retiring at age 65, assuming they both live to age 85. In addition, the study found that retiree health care costs will be $146,400 for someone age 65 who lives 20 more years, while individuals retiring at age 55 will need $372,400 to cover their health care costs to age 85.

The study also found that retiring before age 65 results in higher out-of-pocket spending for consumers. Individuals who retire at age 55 and live to age 75 can expect to pay $155,000 more than the average 65-year-old retiree who lives to age 75 in total out-of-pocket spending, including non-Medicare premiums.

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