About Fidelity's Health Care Cost Estimate For Retirees

by: Dirk Cotton

When I recently posted about a highly-circulated report from Fidelity Investments estimating the expected lifetime cost of health care for a 65-year old couple today at $245,000, some readers were skeptical. Fair enough. We should question the motives of the authors of any study, and one assumes Fidelity generally has a profit motive. There were also complaints that Fidelity published only the expected value of $245,000, so we don't know the distribution of those expected costs.

Fidelity's estimated $245,000 includes the cost of deductibles and co-pays, premiums for optional coverage for doctor visits and prescription drugs, and out-of-pocket expenses for prescription drugs. It does not include long-term care or most dental care.

I queried Fidelity regarding the distribution of those expected costs, but they informed me that the information is considered proprietary. That's OK. There are multiple sources for this kind of data, so I pulled a few of them together for a comparison.

One of my favorite sources, the Center for Retirement Research at Boston College, had this to say in 2009 about expected health care costs in retirement (download PDF):

". . . the mean and 95th percentile of remaining lifetime health care costs, including the cost of nursing home care including . . . Medicare, Medigap, and retiree health insurance premiums. . . are $260,000 and $570,000, respectively."

". . . the results of the same simulation, but excluding the cost of
nursing home care. . . including insurance premiums. . . the age 65 mean and 95th percentile amount to $197,000 and $311,000."

(The four studies mentioned in this post were conducted at different times. For a fair comparison, I adjust the expected expenses to 2014 dollars. Hover over the expenses in yellow to see the 2014 dollar value assuming medical cost inflation from 2009 through 2014 of 3.8, 3.8, 3.6, 3.7, 2.0 and 3.6%, respectively. Values in the table and graph below are shown in 2014 dollars. For example, the CRR reported a cost of $260,000 in 2009. Hovering over that figure above will show the 2014 dollar value of $318,029, which will also appear in the table and graph below.)

A 2013 study sponsored by the Society of Actuaries (download PDF) found the following:

"The future health care needs for a retiree vary by the retiree's current age and their expected lifetime, but are estimated to be about $146,400 for someone currently age 65 with an average expected lifetime of 20 years ( $292,800 for a couple of the same age). That amount includes health care costs not paid for by the federal government through the Medicare program (including Medicare Parts B and C premiums). If they think they will live until age 90 (25 years instead of 20 years) they will need $220,600 (or $441,200 for a couple). These amounts are for the "average" retiree and do not include long term care costs that some retirees may incur."

Another analysis is provided by HealthView Services (download PDF):

"The average lifetime retirement health care premium costs for a 65-year-old healthy couple retiring this year and covered by Medicare Parts B, D, and a supplemental insurance policy will be $266,589. (It is assumed in this report that Medicare subscribers paid Medicare taxes while employed, and therefore, will not be responsible for Medicare Part A premiums.) If we were to include the couple's total health care (dental, vision, co-pays, and all out-of-pockets), their costs would rise to $394,954.

Lastly, the Employee Benefit Research Institute (download PDF) provides expected health care costs for 65-year old couples broken down by the need for prescription medicines. Their estimate ranges from $150,000 for median prescription drug usage to $220,000 for high usage. Their 90th percentile estimate (not 95th!) is $255,000 to $360,000.

Here is the more-precise data in tabular format.

Fidelity Investments Boston College CRR Society of Actuaries HealthView EBRI Average
Publication Date 2014 2009 2010 2014 2013
Mean Lifetime Health Care Costs for a 65-year Old Couple
Excluding LTC Costs $245,000 $240,968 $309,408 $394,954 $155,400 to $227,920 $261,442
Including LTC Costs $318,029 $318,029
90th/95th Percentile Lifetime Health Care Costs for a 65-year Old Couple
Excluding LTC Costs $380,411 $269,464 to $372,960 $328,824
Including LTC Costs $697,217 $697,217

Although Fidelity Investments took it on the chin from some readers for an expected cost appearing too low and for not publishing a standard deviation or 95th percentile estimate, their expected value is almost identical to that from the Center for Retirement Research and only 6% below the average of all studies. EBRI's expected cost was even lower. Furthermore, among the five studies listed, only two provided a 95th percentile expected value.

Why would studies exclude long-term care costs? Medical expenses excluding long-term care are significantly easier to predict than long-term care expenses, so it makes sense to think of them separately. You may have retirement-threatening long-term care expenses or none, at all, but you will undoubtedly have substantial "other" medical care expenses.

The two are insured differently, as well. Medicare covers medical expenses (though, not all) but not most long-term care costs. Long-term care is covered by LTC insurance or Medicaid. So, there's another reason to think of them separately. They are different and distinct risks.

It's important to note that, according to this AARP Bulletin, health care costs will consume most of the future Social Security benefits for some households. And as HealthView puts it:

"With health care cost inflation rate likely tripling COLAs for the foreseeable future, retirees will eventually use more of their Social Security income to pay for health care. Over time, the compounding effect of this differential will place incredible stress on the average retirement budget."

According to AARP, health care costs will consume most of the future Social Security benefits for some households.

According to Fidelity Investments, their 2015 Couples Retirement Study showed that "nearly three-fourths of couples surveyed said being able to afford unexpected health care costs in retirement was their top concern. However, only 22 percent of couples had factored it into their financial planning." It should be near the top of every retiree's list of concerns and factored into everyone's retirement plan.

Nearly three-fourths surveyed by Fidelity said affording health care costs in retirement was top concern, but only 22% planned for it.

The range of potential lifetime health care expenses for retirees is huge and there is no way to predict where an individual household will fall within the spectrum, so how does a retiree best use this data for planning purposes? Consider the following:

  • Even the best-case predictions for lifetime health care costs in retirement will threaten the budgets and sustainability of many households. Health care costs should play an important role in retirement budget planning.
  • Estimate them as accurately as you can for your individual circumstances. Consider the averages a starting point and Google costs for health care and long-term care in your geographic area, and consider your own health.
  • Assume a higher rate of inflation for medical expenses than for other costs. The cited HealthView paper reports medical cost inflation of around 3.7% for the past few years, but that is historically low. (The Economist provides a chart of historical rates of health care cost inflation here.)
  • Because this key budget item is so unpredictable, especially the long-term care component, consider reducing your overall spending a bit to provide some safety margin.
  • Plan for expected (mean) annual health care costs excluding long-term care, but be aware that your own costs may be a lot lower or several times higher than you "expect." (Don't plan on expected lifetime costs as these assume median life expectancy. Your retirement plan should anticipate a long life.)
  • Look at long-term care costs separately. They can break the bank.
  • When we combine elder bankruptcies caused by medical expenses with those caused by credit card debt spawned by medical expenses, health care costs are the greatest bankruptcy threat to retirees. Protect your retirement assets from creditors as best you can.