How much will healthcare cost once I’m retired?

While some costs reduce for people when they retire, old age can also bring more ailments necessitating trips to the doctor. For most Americans, one of the largest expenses in retirement is expected to be healthcare.

Healthcare costs have been rising dramatically over several decades and are expected to keep rising. Based on the current trends, Fidelity has calculated that the average 65-year-old couple that retires in 2022 could now need around $315,000 to cover future healthcare expenses including Medicare premiums and out-of-pocket expenses.

15% of annual expenses will be health care-related expenses

The amount of money that you need to have saved up to live comfortably in retirement depends on when you retire and where. Your health and expected longevity will also factor in. A 2021 survey from Natixis Investment Managers found with the average life expectancy currently 79, individuals believed that they will live around 22 years in retirement.

On average respondents to the survey hope to retire by age 62, that’s 3 years before they are eligible to enroll in Medicare. Many Americans plan to rely on Medicare to cover their healthcare expenses, but it comes with limitations.

“We estimate that about 15% of the average retiree’s annual expenses will be used for health care-related expenses,” said Steve Feinschreiber, senior vice president of the Financial Solutions Group at Fidelity. This estimate includes what people will spend on traditional Medicare, which between Medicare Part A and Part B covers expenses such as hospital stays, doctor visits, services, and more, along with Medicare Part D, which covers prescription drugs.

The cost of healthcare is rising

A 65-year-old couple retiring this year can expect to spend an average of $315,000 in healthcare and medical expenses throughout retirement according to the 2022 Fidelity Retiree Health Care Cost Estimate. The 21st annual estimate is up 5 percent over last year, an increase of $15,000, and nearly double the first estimate of $160,000 Fidelity made in 2002.

The amount that individuals need to save isn’t the same for a man as it is for a woman. Given that women have a longer life expectancy, they will need to have $165,000 tucked away and men only $150,000.

How to save for retirement healthcare expenses

Although 62 is the earliest you can begin collecting Social Security benefits, it comes with a penalty. The full retirement age for Social Security is slowly creeping up but is 67 for everyone born in 1960 or later.

Those that retire prior to full retirement age will receive smaller monthly benefit payments. Vice-a-versa, those that continue to work until they are 70 will be able to claim increased benefit amount above and beyond the full retirement age amount. However, Social Security benefits will only cover a part of what you will need in retirement. The current average monthly benefit for a retired worker is $1,615.81.

When preparing for retirement there are several options which can provide tax benefits now and, depending on the account, give you savings later. Building up your employer 401(k) account or an Individual Retirement Account (IRA) gives you a tax break now, but you’ll be taxed when you withdraw later. If you convert them to Roth 401(k) or Roth IRA the gains and qualified withdrawals are not taxed but you’ll pay taxes on the money you put in. You’ll want to talk to a financial advisor to see which works best for you.

Fidelity recommends that people consider enrolling and contributing to a health savings account (HSA), if you are still working and your employer has one available. The money you contribute, the gains and withdrawals, given they are used for qualified healthcare expenses, are all tax-free for federal and state tax purposes.

Once you turn 65, they act like a traditional retirement plan and non-medical withdrawals can be made without being penalized. Withdraws prior to turning 65 can carry a heavy tax penalty.