How rising retiree medical costs highlight the role of HSAs

The amount of money Americans can expect to pay for medical care in retirement is increasing—and the total is a lot higher than most employees are anticipating.

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A new report from Fidelity Investments reveals that a 65-year-old couple retiring this year can expect to spend an average of $315,000 in healthcare and medical expenses throughout retirement—a 5% increase from last year. The provider’s annual estimate, which it has been releasing since 2002, assumes a heterosexual couple where both members 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. The total includes Medicare premiums, copays and out-of-pocket services that Medicare doesn’t cover.

The $315,000 figure—women are anticipated to spend $165,000 throughout retirement, and men will spend an average of $150,000—is a stark contrast to what Americans think they will spend on medical care in retirement. Fidelity found that, on average, couples expect their spending to add up to $41,000 throughout retirement—a whopping $274,000 below the estimate. Meanwhile, 68% expect their costs will be less than $25,000.

“Staying informed on potential future healthcare costs should remain a top factor when planning for retirement,” Hope Manion, senior vice president at Fidelity Workplace Consulting, said in a statement. “Healthcare issues can feel unpredictable. However, by planning early and saving consistently, people can put themselves in a much stronger position to retire how and when they want.”

Fidelity’s estimate comes as healthcare costs in general are expected to rise due to a number of factors, including rising inflation; health system consolidation; deferred care, missed preventive care and late diagnoses because of the pandemic; COVID-19 infections; and long-haul COVID.

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Related: ‘Time for employers to take action’ on soaring healthcare costs

Fidelity’s research has implications for employers and HR leaders who are navigating myriad challenges—including holding down healthcare costs and helping employees as they struggle with their finances and saving for expenses. A recent report from consulting firm Willis Towers Watson found that nearly all U.S. employers (94%) say managing healthcare benefit costs will be their top priority over the next two years.

Employees who have robust employer-sponsored retirement plans—as well as education from their organizations on preparing financially—are often in a better position for their post-work years. Health savings accounts, too, are a growing piece of the puzzle, with experts pointing to the vehicles as a smart way to save for healthcare costs in retirement. HSAs offer a triple-tax advantage: HSA contributions are tax-deductible, the money grows tax-free and account money can be spent tax-free for qualified medical expenses.

Related: IRS takes shot at rising inflation with 2023 HSA limits

Not surprisingly, once respondents were informed of Fidelity’s estimate, 70% said they felt unprepared to cover healthcare expenses during retirement. However, the feeling of preparedness increases among those with an HSA. Nearly half (47%) of HSA holders feel prepared for their healthcare retirement expenses, compared to just 27% of people who do not own an HSA.

“There continues to be an opportunity for additional education on the power of a health savings account, especially for younger people who likely have decades to save and invest before they retire,” Manion says. “The top healthcare concern for younger people is being able to afford unexpected healthcare costs, meaning an HSA could be an effective way to address this worry and these potential expenses.”

Insights into how HR leaders can navigate these and other rising benefits costs will be on the agenda at the HR Technology Conference this fall, including in a session titled “Unpacking the Healthcare Crisis: Delivering Equitable Benefits Outcomes in 2022 and Beyond.” Learn more about the event and other sessions here.

Kathryn Mayer
Kathryn Mayer is HRE’s benefits editor and chair of the Health & Benefits Leadership Conference. She has covered benefits for the better part of a decade, and her stories have won multiple awards, including a Jesse H. Neal Award and honors from the American Society of Business Publication Editors and the National Federation of Press Women. She holds bachelor’s and master’s degrees from the University of Denver. She can be reached at kmayer@lrp.com.

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