Health Care Expenses in Later Life — the Elephant in the Room

Nov 17, 2021

When you’re young and healthy, it’s hard to envision one day incurring catastrophic health care costs. Besides, there will be time to think about that later, right? And yet, as with so many things, when you’re young is precisely the time to take action for the benefit of your future self.

That point was emphasized in Fidelity’s most recent study of retiree health care costs. The company estimates that a 65-year-old couple retiring this year can expect to spend $300,000 on such costs throughout their retirement. Fidelity’s calculation assumes the couple uses original Medicare and the tally takes into account premiums, including Part D prescription drug coverage, as well as deductibles and co-insurance costs. It does not account for dental or long-term care costs.

On the one hand, if this couple lives another 20 years, that works out to $15,000 per year or $1,250 per month. That could be less than a younger person is paying per month right now for health care (certainly the case in our household!). On the other hand, Fidelity’s estimate is an average. Individual people’s actual health care needs vary considerably. The big unknown is whether you will need long-term care, and if so, for how long and at what cost?

A call for earlier preparation

Perhaps the most important aspect of the study is that it calls attention to the benefits of planning ahead for later life health care costs. While health care is a common concern, especially as people near retirement, Fidelity’s study noted that 58% of today’s workers have spent little or no time planning for how they will meet the cost of their post-retirement health care.

The study also highlighted the opportunity many younger workers have to prepare for such costs, especially those who qualify for a health savings account (you need to have a high-deductible health insurance plan). For example, a 35-year-old couple that maxes out HSA contributions, invests the balance (assuming an average annual return of 7%), and uses other funds to cover some or all of current out-of-pocket health care costs, could realistically amass what should be plenty of money to pay for their later life health care.

As the illustration below shows, such a couple could use half of their HSA money for current expenses and still end up with a later life health care nest egg of nearly $500,000. If they don’t tap any of the money for current costs, they could end up with nearly $1,000,000.

Elevating the role of an HSA

As we noted earlier this year in Elevating the Role of Health Savings Accounts, the consulting firm Willis Towers Watson recently encouraged people to think of an HSA as a retirement account. The company suggested that qualifying workers make funding such an account their second-highest retirement-investing priority, right after investing enough in a workplace retirement plan to receive all available matching money an employer offers.

A number of HSA providers allow balances to be invested, not just saved, and Morningstar’s most recent evaluation of the HSA landscape gave Fidelity its highest marks. In fact, Fidelity was the only provider to receive Morningstar’s “High” assessment on a five-tier scale. Calling it the “clear-cut winner,” Morningstar noted that Fidelity offers a wide range of investment options and low fees. SMI came to a similar conclusion in our analysis, writing the following in March 2021:

It’s noteworthy that Fidelity is Morningstar’s top choice since it is also SMI’s top recommended broker. Opening a Fidelity HSA would enable you to use any SMI strategy to manage that account. The SMI Funds and SMI Private Client also allow for the use of HSAs, with Private Client able to manage balances using a custom blend of SMI strategies.

Other steps you could take to prepare for post-retirement health care costs include:

  • Once you turn 65 and are eligible for Medicare, give careful consideration to which will be more beneficial to you — a Medicare Advantage plan or traditional Medicare plus Medigap. Some Medicare Advantage plans may pay for expensive items such as hearing aids, which traditional Medicare does not cover. If you plan to split your time in retirement, living in two locations, be sure the plan your choose will cover you in both places. (See the article links in the sidebar for more on this topic.)

  • Have honest conversations with your family about future medical care issues. People often “don’t want to be a burden” to their adult children, but those children may be very open to the idea of a multi-generational living arrangement, which used to be much more common. Also discuss how much care you would want if you became terminally ill and specify your wishes in a living will.

  • Consider what you would do in case you need long-term skilled care. What’s the likelihood? Do you have a family history of dementia? Should you consider a long-term care insurance policy?

  • Take good care of yourself. While we can't control all of the factors that impact our health, many of today’s most common health issues are self-inflicted through poor diet, lack of exercise, too little sleep, too much stress, and other controllable factors.

What are you doing to prepare for later life health care costs?

Written by

Matt Bell

Matt Bell

Matt Bell is Sound Mind Investing's Managing Editor. He is the author of five biblical money management books and the teacher or co-teacher on three video-based small group resources. His latest book, Trusted: Preparing Your Kids for a Lifetime of God-Honoring Money Management, has just been published by Focus on the Family and its publishing partner, Tyndale House (April 2023). Matt has spoken at churches, universities, and conferences throughout the country and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.