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What Will Healthcare in Retirement Cost You? Try $295,000.

By Maurie Backman - Aug 5, 2020 at 7:04AM

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Healthcare costs continue to rise, and seniors need to prepare for them.

There's a reason so many seniors fear the idea of retirement: Leaving the workforce means moving over to a fixed income while having to deal with a host of financial unknowns. And while some expenses do tend to go down in retirement, others, like healthcare, can be more expensive than what you're used to.

Each year, Fidelity releases its annual Retiree Health Care Cost Estimate, and this year, it states that the average 65-year-old couple retiring in 2020 can expect to spend a whopping $295,000 on medical expenses throughout retirement. That represents a 3.5% increase from last year's $285,000 estimate, and an 18% increase since 2010. That figure also breaks down into $155,000 for single female retirees, and $140,000 for single male retirees, the reason being that women tend to outlive their male counterparts.

Doctor talking to older man seated on exam table

Image source: Getty Images.

Now there are a few things you should about Fidelity's estimate. First, it's exactly that -- an estimate. It doesn't mean that you'll spend $295,000 as a couple throughout retirement, but it also means you could end up spending more if you have known health issues that are expensive to treat. Secondly, Fidelity's numbers assume that you're enrolled in original Medicare (Parts A and B, which cover hospital care and outpatient services, respectively), and that you also have a Part D plan, which covers prescription drugs. It also assumes you'll live an average life expectancy based on data from the Society of Actuaries.

But also, that $295,000 doesn't account for all of your costs. While it includes Medicare premiums, copayments, and deductibles, it does not include most dental services and long-term care. As such, your total tab could actually be much higher, and that's something you'll need to prepare for.

How to pay for healthcare in retirement

If the idea of having to spend $295,000 -- or more -- on healthcare in retirement is throwing you for a serious loop, there are a few things you can do to prepare. First, boost your retirement savings. If you're 50 or older, you can contribute up to $26,000 a year to a 401(k), or up to $7,000 a year to an IRA. Save another $200 a month for the next 15 years on top of your current savings rate, and you'll add $60,000 to your retirement plan balance, assume you invest your 401(k) or IRA at an average annual 7% return, which is just below the stock market's average.

Another option is to fund a health savings account, or HSA. Not everyone is eligible for one of these accounts, but if you're enrolled in a high-deductible health insurance plan -- defined in 2020 as a deductible of $1,400 or more for self-only coverage, or $2,800 or more for family coverage -- then you may have the option to contribute.

HSA funds can be used immediately, or carried forward into the future (including retirement) to pay for medical expenses later in life. Like 401(k)s and IRAs, there are tax breaks involved in funding an HSA, and currently, you can contribute up to $3,550 a year if you're putting in money on your own behalf, or up to $7,100 if you're contributing at the family level. If you're 55 or older, you get a $1,000 catch-up contribution as well.

Don't get caught off-guard by healthcare expenses

There's no getting around having to pay for healthcare during retirement, so it pays to prepare as best as you can. While Fidelity's $295,000 figure shouldn't be taken as gospel, it's certainly a good starting point to work with in the course of your retirement planning.

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