2023 retiree health care cost estimate: Expected to ‘stay flat’ from 2022

Limits to out-of-pocket prescription drug costs outlined in the Inflation Reduction Act of 2022 will temporarily offset the overall inflationary trend of health care costs for retirees for the first time in nearly a decade. According to Fidelity Investments’ 2023 Retiree Health Care Cost Estimate, a 65-year-old retiring this year can expect to spend an average of $157,500, or $315,000 per couple, in health care and medical expenses throughout retirement, unchanged from the firm’s 2022 estimate. That estimate is nearly double the firm’s 2002 estimate of $80,000 in health care expenses per retiree.

“This was the first time in nearly a decade that our Retiree Health Care Cost Estimate had stayed flat from the prior year, which was surprising to many,” said Hope Manion, senior vice president and chief actuary, Fidelity Workplace Consulting. “The impact of recent legislation was part of the calculation, which means we accounted for the out-of-pocket cap on prescription drug spending by retirees, and that balanced out the general trend of rising inflation in health care costs.”

While this year’s estimate offers a welcome reprieve from a decade of increasing health care costs, retirees are still expected to cover significant costs above and beyond what Medicare covers, said Manion. Americans continue to underestimate how much they might spend on health care in retirement, with data from last year revealing they expect a couple to spend only $41,000 on health care once they retire, far below Fidelity’s estimates. Understanding what health care costs may be in the future is an essential part of the retirement planning process, she said.

The most important thing pre-retirees can do is to consider how health care costs are part of their overall retirement budget, said Manion.

“While many think it’s as simple as becoming eligible for Medicare and paying little-to-nothing for health care, that’s not the case,” she said. “Saving what you can before you retire, and making sure you’re factoring health care into your retirement plan overall, is a great place to start.”

The retirement planning process should incorporate health care costs and medical and drug expenses not covered by Medicare. Fidelity also encourages pre-retirees to consider participating in a health savings account (HSA) when possible to save for health care expenses in a tax-advantaged vehicle.

Related: Retirees will need hundreds of thousands of dollars for post-retirement Medicare costs, report finds

“Employers have an important role to play when it comes to helping their employees prepare for health care costs in retirement,” said Manion. “Simple things like making sure you communicate the benefits of HSAs to your employees, and help them understand the money can be saved and invested over the long-term, can help them take advantage of this simple tool for retirement health care savings.”

Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel.