Long-Term Care Insurance Could Add an Additional $130,000
BOSTON–(BUSINESS WIRE)– Paying for health care can be one of the largest expenses for people in retirement. A 65-year-old couple retiring in 2016 will need an estimated $260,0001 to cover health care costs in retirement, according to Fidelity’s Retiree Health Care Cost Estimate. This is a six percent increase over last year’s estimate of $245,000 and the highest estimate since calculations began in 2002.
The estimate applies to retirees with traditional Medicare insurance coverage and provides a general idea of the monthly expenses associated with Medicare premiums, Medicare co-payments and deductibles, and prescription drug out-of-pocket expenses.
The six percent increase in this year’s estimate is attributed to several factors, including an uptick in the utilization of medical services and rapidly rising drug costs.
“In recent years, the health care industry has experienced a period of historically low spending levels, due to a range of factors including a period of slow economic growth,” said Adam Stavisky, senior vice president, Fidelity Benefits Consulting. “Looking forward, we expect health care spending to pick up2 from where it’s been in recent years, though less than what we’ve seen over the last few decades.”
This year, Fidelity also examined the costs associated with long-term care, which could impact seven in 10 Americans who reach age 65 in the next five years3.
While Medicare covers many health-related expenses in retirement, long-term care costs are only covered by Medicare in limited circumstances. Fidelity estimates that a 65-year-old couple would need $130,000, in addition to savings for retiree medical expenses, to insure against long-term care expenses. This assumes the couple is in a good health and purchases a policy with $8,000 monthly maximum benefit, with three years of benefits, and an inflation adjuster of 3 percent per year.
Long-term care expenses are based on many factors, and the need for long-term care insurance (and level of coverage) is highly dependent on individual circumstances. To help people better understand long-term care and long-term care coverage options, Fidelity recently published “Long Term Care: Challenges and Changes.”
“Long-term care is an increasingly important part of retirement planning, as a significant percentage of retirees will likely need some level of long term-care in retirement. Unfortunately, recent Fidelity research4 on family finances has shown that less than half of parents surveyed have not had detailed conversations about long-term care with their kids. Planning on how to address these potential costs will help avoid placing the burden of care on family and friends,” added Stavisky.
Health Savings Accounts Can Help Address Health Care Costs in Retirement
To help employees manage health care expenses, a growing number of companies are offering high-deductible health plans (HDHP) with a health savings account (HSA). The popularity of HSAs is booming, with the number of HSA accounts in the U.S. rising to 16.7 million in 2015, an increase of 22 percent from the previous year.5
One reason for the increase is that HSAs offer a triple-tax advantage to save for qualified medical expenses both in the short and long term. Since many people save more in their HSA than they spend, more are choosing to invest their HSA money to help it grow for use in retirement.
Fidelity provides HSAs for almost half a million workers and has HSA assets of about $1.5 billion. In the past year, the number of Fidelity HSA account holders increased by 38 percent and HSA assets increased by 40 percent6. To understand the role HSAs play in overall financial wellness, Fidelity has published “Three Healthy Habits for Health Savings Accounts,” which is available on fidelity.com.
About Fidelity Investments
Fidelity’s goal is to make financial expertise broadly accessible and effective in helping people live the lives they want. With assets under administration of $5.4 trillion, including managed assets of $2.1 trillion as of June 30, 2016, we focus on meeting the unique needs of a diverse set of customers: helping more than 25 million people invest their own life savings, nearly 20,000 businesses manage employee benefit programs, as well as providing nearly 10,000 advisory firms with investment and technology solutions to invest their own clients’ money. Privately held for nearly 70 years, Fidelity employs 45,000 associates who are focused on the long-term success of our customers. For more information about Fidelity Investments, visit https://www.fidelity.com/about.
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1 Estimate based on a hypothetical couple retiring in 2016, 65-years-old, with average life expectancies of 85 for a male and 87 for a female. Estimates are calculated for “average” retirees, but may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes. The Fidelity Retiree Health Care Costs Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government’s insurance program, Original Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care. Life expectancies based on research and analysis by Fidelity Investments Benefits Consulting group and data from the Society of Actuaries, 2014.
2 “The Facts on Medicare Spending and Financing,” by Juliette Cubanski and Tricia Neuman, Kaiser Family Foundation, July 20, 2016.
3 “Perspectives on the Challenges of Financing Long-term Services and Support,” LeadingAge Pathways Report, February 2016.
4 Family & Finance Study, previously known as the Fidelity Investment’s Intra-Family Generational Finance Study. According to the report, 43% of parents indicate they have not had detailed conversations with family members about long-term care and eldercare. The study was conducted online among U.S. parents and their adult children during the period of February 26 – March 22, 2016 by GfK Public Affairs and Corporate Communication, using GfK’s KnowledgePanel®. The total sample recruited for this study included 1,273 parents and 221 adult children. To qualify, parents had to be at least 55 years of age, have an adult child older than 25 and have investable assets of at least $100,000. Their children qualified if they were at least 25 years of age, had money saved in an IRA, 401(k) or other investment account. In addition, adult children 30 and older were required to have at least $10,000 saved. This qualifier was waived for the children under 30.
5 Devenir research, “2015 Year-End HSA Market Statistics and Trends,” February 17, 2016.
6 Internal Fidelity data, growth from Q2 2015 to Q2 2016.
Source: Fidelity Investments