Financial Planning, Retirement

Do Not Underestimate This Retirement Expense

4/12/19 8:00 AM

iStock-626627280.jpgIt is never too late to start saving for retirement, and earlier this year we even learned that a person with no money set aside at age 50 who finally begins maxing out his or her annual 401(k) contributions can still amass $1 million by age 70. A million dollars, though, is not the substantial sum of money that it once was, and many Americans may be shocked by how quickly they can go through such a nest egg. One thing that can wind up eroding a person’s retirement savings a lot faster than anticipated is healthcare, and even wealthy individuals recognize that they cannot afford to ignore potential old-age medical expenses.

Indeed, an earlier UBS survey found that nearly seven in ten U.S. investors with at least $1 million in assets cited healthcare costs as their biggest retirement concern. Those worries are understandable given that Fidelity Investments this month estimated that a 65-year-old couple retiring in 2019 will need to have around $285,000 set aside just to cover their likely healthcare costs in old age. That is a 2 percent increase from only twelve months ago and a 78 percent jump since 2002 when this study was started. Moreover, the headline 2019 forecast is derived by adding together the expected medical outlays for a 65-year-old male ($135,000) and female ($150,000), and each of those individual numbers is nearly as large as the combined couple’s total from 2002 ($160,000).


What is worse is that these estimates do not even take into account the costs of over-the-counter medications, most dental services, and long-term care. The researchers added that additional expenses are likely if retirement begins prior to Medicare eligibility, something which 56 percent of respondents in a 2018 Fidelity survey said they could not avoid. Nearly one-third of those individuals reported that they retired sooner than expected due to a health event that affected them or their spouse, and 49 percent of early retirees said that they had to rely primarily on their personal savings to cover the out-of-pocket premiums, co-pays, and deductibles associated with insurance coverage. All of this only increases the importance of setting aside as much money for retirement as possible.

The sooner one can start the better, and additional help is available by utilizing a 401(k) plan and other tax-advantaged savings vehicles. In fact, the newer Fidelity study estimated that a 35-year-old couple could amass enough money in a health savings account (HSA) by age 65 to cover the $285,000 in projected healthcare costs by contributing just $2,820 annually. Fidelity’s Hope Manion added that “We recognize that when today’s 35-year-olds retire in 2049 their medical costs could be more than this year’s estimate, and the U.S. health care system could potentially look dramatically different. It’s hard for any of us to predict that far out, but it’s prudent to anticipate that health care costs could represent a significant expense in retirement and prepare as much as we can.”



Sources: UBS, Bloomberg, Fidelity Investments

Post author: Charles Couch