A relief for retirees: Expected health care costs didn't increase this year

As everybody knows, overall healthcare costs have been climbing annually. But tell that to older Americans. Fidelity’s annual survey of estimated healthcare costs in retirement, astoundingly, was unchanged from last year.

That means that a retiree leaving the workforce this year will likely shell out the same amount of money on healthcare throughout retirement as someone who retired in 2022. The after-tax cost for medical expenses throughout retirement for a single, 65-year-old retiree held steady at $157,500 ($315,000 for the average retired couple at the same age), according to the new 2023 Retiree Health Care Cost Estimate, which tracks retiree healthcare expenses annually.

"This is the first time in nearly 10 years that we’ve seen the estimate stay flat," Hope Manion, senior vice president and chief actuary at Fidelity, told Yahoo Finance. The reason: "the impact of recent policy changes to Medicare coverage on our estimate," she said.

While the survey is certainly good news, few retirees have budgeted for that kind of outlay and finding ways to grapple with it is non-negotiable. Younger Americans, too, would be wise to hone in and plan now for what’s likely to be one of their biggest living costs when they step out of the workforce. Bottom line? There are things that can be done now to address future costs later in life.

The after-tax cost for medical expenses throughout retirement for a single, 65-year-old retiree held steady at $157,500 ($315,000 for the average retired couple at the same age). (Getty Creative)
The after-tax cost for medical expenses throughout retirement for a single, 65-year-old retiree held steady at $157,500 ($315,000 for the average retired couple at the same age). (Getty Creative) (John Fedele via Getty Images)

When Medicare kicks in at 65, it’s far from a free ride. What is keeping costs in check is mostly the big changes in Medicare delivered by the Inflation Reduction Act signed into law last year.

For example: The benefit to 3.3 million Medicare Part D beneficiaries with diabetes who now have insulin capped at $35 for a month’s supply. Starting July 1, beneficiaries whose insulin is covered under Part B will also be covered under the cap. Another notable change this year: Vaccines, such as the pricey shingles med, covered under Part D will come with no copays or deductibles.

Most of the provisions for the 59 million Medicare beneficiaries, including lower prescription drug prices and out-of-pocket costs, won’t step in for a few more years, but are factored into this year’s estimate.

Starting in 2025, annual out-of-pocket Medicare Part D prescription drug outlays will be capped so that no enrollee will be required to pay more than $2,000 out of pocket per year. That limit will impact 50 million Americans—and directly help the 1.4 million Medicare patients who spend more than $2,000 on medications each year. That includes people who need high-cost cancer drugs, according to a Kaiser Family Foundation (KFF) analysis.

To be sure, the Fidelity estimate is nearly twice what it was when it first ran this calculation in 2002. At that time, it was $80,000 for a single retiree. And there are plenty of caveats to consider when tallying up your figure. What you will spend in retirement for medical care will vary depending on where you live, your overall health, and how many years you will live in retirement.

The Fidelity estimate assumes retirees 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.

A ‘big concern for retirement security’

While the Fidelity projection was flat this year, that’s not what the overall trend in healthcare expenses is in this country. The cost to treat patients will rise an estimated 7% in 2024, which is unwelcome news for insurance premiums, according to a new report from PwC. The big increase comes on top of more than 6% growth this year, compared to 2022, and 5.5% growth in 2022.

"The rising out-of-pocket healthcare costs, including the high risk of long term care expenses, is a big concern for retirement security," Richard Johnson, director of the Program on Retirement Policy at the Urban Institute, told Yahoo Finance.

A senior adult man sitting at a table or desk stacked with papers and envelopes looking down with his hands on his head.
Health care headaches: Nearly four in 10 retirees report health care expenses are higher than they expected them to be when they first retired. (Getty Creative) (smartstock via Getty Images)

The Fidelity estimate might fall short for many Americans.

"Last year, I figured out with our team… that the average out-of-pocket healthcare costs for a couple during their retirement was close to $450,000," said Ken Dychtwald, CEO of Age Wave, a think tank and consulting firm. "It’s astronomical, and that almost never shows up in any kind of retirement discussions."

How to plan for healthcare costs in retirement

About 15% of the average retiree's annual expenses will be health-related, per Fidelity. And nearly four in 10 retirees report health care expenses are higher than they expected them to be when they first retired, according to a survey by the Employee Benefit Research Institute (EBRI) and Greenwald Research.

"Our overall message to our clients is that unmanaged health care costs can derail even the strongest financial plans," Jacob Sadler, a certified financial planner and senior advisor at Bay Point Wealth in Annapolis, Md. "It’s essential each year to understand what your insurance options are, select the coverage that fits best for your situation, and plan for rising costs over time."

One way to prepare is through a health savings account (HSA), which allows investors to contribute, invest and withdraw money tax-free when used for qualified medical expenses. HSAs are not an option for everyone, though — some workers do not have access to this type of account at their jobs, while for others it may be unaffordable since they’re tied to high-deductible health plans.

The new 2024 annual limit announced by the IRS on HSA contributions for individuals will be $4,150, a $300 or 7.8% uptick from the $3,850 limit in 2023. For family coverage, the HSA contribution limit rises to $8,300, up $550 or 7.1% from $7,750 this year. The extra catch-up contribution for account holders 55 and older remains fixed at $1,000.

"The upshot here is that retirees are going to need to have a pretty sizable chunk of change saved in order to pay for their healthcare costs," said Jake Spiegel, a research associate, health and wealth benefits, at EBRI.

And chances are, it’s going to be a whole lot more than you can even imagine. Fidelity's estimates are "a good starting point, but they don't capture any personalization," Christine Simone, co-founder and CEO of Caribou, a Miami-based fintech firm that provides healthcare planning software to financial advisors, told Yahoo Finance. 

"Estimates," she added, "typically speaking, don't capture the complexity of someone's unique situation, and can be misleading."

Kerry Hannon is a Senior Reporter and Columnist at Yahoo Finance. She is a workplace futurist, a career and retirement strategist and the author of 14 books, including "In Control at 50+: How to Succeed in The New World of Work" and "Never Too Old To Get Rich." Follow her on Twitter @kerryhannon.

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