2024 retiree health care cost estimate is $165,000: Fidelity

Health care continues to be one of the largest expenses in retirement – and retirees need to plan for that, according to Fidelity, which just released its 23^rd annual Retiree Health Care Cost Estimate, which says retirees may need $165,000 to cover health care expenses – a jump of 5% from 2023.

“Health care costs are among the most unpredictable expenses, especially when it comes to retirement planning,” said Robert Kennedy, SVP, Workplace Consulting at Fidelity. “As we approach the fall open enrollment period for health care benefits, it’s a great time for Americans to be proactive with their financial planning efforts.”

According to Fidelity, there continues to be a disconnect for many Americans between the actual projected costs and how much they believe they will spend on health expenses in retirement. The average American estimates costs will be about $75,000 – less than half of Fidelity’s calculation.

“Navigating the health journey is undoubtedly complicated, and the looming cost of care in retirement certainly does not make it any easier from a planning perspective,”  said Karen Volo, Head of Health and Benefit Accounts at Fidelity.

Fidelity’s $165,000 estimate assumes an individual is enrolled in traditional Medicare—both Part A and Part B—which covers most hospital care and doctor visits, and Part D—which covers prescription drugs. However, Medicare premiums, over-the-counter medications and dental and vision care are left to retirees to manage on their own.

Fidelity

Employers have an important role to play when it comes to helping their employees prepare for health care costs in retirement.

“Health care will be one of the largest expenses in retirement for many Americans, and we’re increasingly seeing scenarios where retirees do not have access to employer-sponsored health benefits,” said Volo. “This means health care costs consume a much larger portion of retirement budgets than in the past, so it’s important that employers equip their workforce with the tools and knowledge they need to make informed decisions about their health care no matter what stage of life they are in.

“Education is key—investing in high-touch support during the annual enrollment period and beyond to ensure benefits information is clear and easily accessible is a great first step for employers to take. Things like educational webinars or hands-on training opportunities can substantially improve employees’ fluency of their benefits options.”

Even if employers do not offer retiree medical coverage, employers can still provide resources to their workforce that allows them to make informed decisions when retirement is on their doorstep. “There are several critical pieces of information that they can communicate—for example, options to bridge health care coverage between early retirement and Medicare eligibility,” said Volo. “This can be as simple as providing guidance around how long their coverage is available under COBRA, a how-to guide for obtaining private insurance, or a roadmap on whether they may qualify to receive coverage from the public health care marketplace.”

Employers also need to communicate the benefits of health savings accounts (HSAs), which give them a tax-advantaged way to save for short- and long-term health expenses. “HSAs can be a great tool to not just save for expenses in retirement, but also to stay on top of expenses now thanks to their tax advantages: money is contributed to the account pre-tax, there are no taxes while money grows in the account, and employees aren’t taxed when they withdraw money to pay for qualified medical expenses,” said Volo.

Every employee’s situation is unique, so the amount they should have in their HSA is not a one-size-fits-all approach. Fidelity recommends employees first contribute at least up to the company match in their 401(k) and that they take advantage of a company contribution to an HSA, recommends Volo. Then consider maxing out the HSA to leverage the account’s tax advantages. “For 2024, the IRS limit for HSA contributions is $4,150 per year for individuals and $8,300 for families,” said Volo. “Employers should also keep in mind—and make sure their employees are aware—that individuals 55 and older are also eligible for an additional $1,000 catch-up contribution annually.”

Related: How much does a retiree need to save for health care expenses?

“Health care will likely be one of your top 5 expenses in retirement,” says Steven Feinschreiber, Senior Vice President of Financial Solutions at Fidelity. So employees need to consider earmarking a portion of their 401(k) or IRA along with HSA to help pay for expected health care costs throughout their retirement.”