Here's How Much a Couple Retiring in 2021 Will Need for Medical Costs: Fidelity

A 65-year-old, opposite-gender couple leaving the workforce in 2021 can expect to spend $300,000 in health care and medical expenses through retirement, a new high, according to Fidelity Investments' latest retiree health care cost estimate.

For single retirees, the 2021 estimate is $157,000 for women and $143,000 for men.

This year's estimate is up 30% from 10 years ago, when the amount was $230,000, but up just 1.7% from 2020, as health care inflation has remained relatively flat over the last few years, according to Fidelity.

Fidelity's estimate has skyrocketed by 88% since it began measuring health care costs in 2002, when its first estimate was $160,000.

"While this past year has certainly made protecting our health today a priority, we need to do the same when planning for future health care needs," Hope Manion, senior vice president for Fidelity Workplace Consulting, said in a statement.

"By providing this estimate for retirees, we want to increase awareness among people of all ages to help them proactively get more engaged in saving and investing, so they can be better prepared in years to come."

Broader awareness is much needed, Fidelity noted, as 58% of current employees in the firm's survey from earlier this year said they had spent little or no time thinking about what they need to cover in retirement.

Even among those who have put some thought into the matter, half believed they would need $50,000 or less to meet health care expenses.

Fidelity's estimate assumes that both members of the couple 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 and lab tests, and in Medicare Part D, which covers prescription drugs.

Saving $300,000 and Beyond

Fidelity said its estimate for retirees should also be a call to action for younger Americans to start saving early and consistently, as health care costs will likely continue to rise.

And indeed, saving for both retirement and health care is on the rise. Fidelity said its own customer data, representing millions of working Americans across the country, reported high savings rates and balances across 401(k), 403(b) and IRA accounts at the end of 2020.

Moreover, new health savings account openings have risen by 19%, and total assets have grown by 52%, surpassing $10 billion in the past year.

Manion said that though daunting, the goal of saving $300,000 is achievable with some planning.

"We continue to see many HSA owners not using these accounts to their full potential, in particular not using the power of investing to potentially grow their savings. And that's the step that can make a big difference, especially for younger people with time on their side."

At the start of the year, just 16.5% of Fidelity HSAs were invested.

Fidelity posited two couples to show the advantages of investing HSAs. One couple save and invest their annual HSA contributions over 30 years, which takes into account that a future health care savings goal will likely be greater than $300,000 over time.

By maxing out HSA savings opportunities and investing at an average hypothetical 7% annual rate of return, this couple could potentially accumulate $300,000 after about 18 years, and a balance of nearly $1 million after 30 years.

The second couple are not able to do that. Instead, they contribute the maximum, withdraw 50% each year to pay for current qualified medical expenses but leave the remaining 50% invested, also earning an average 7% return. Their balance could still grow to $300,000 after about 25 years, reaching nearly $500,000 after 30 years.

Fidelity noted that even with a plan in place, those nearing retirement sometimes need to adjust, either by choice or necessity.

According to a Fidelity study released in October, 82% of Americans said the pandemic had affected their retirement plans. Twenty-two percent of those within a decade of retirement said they were accelerating their timeline to leave the workforce.

Of this group, 80% were younger than 65, meaning they would need to bridge their health care options before they become eligible for Medicare.

— Check out Federal Long-Term Care Programs Get $1.4 Billion More on ThinkAdvisor.