Cost of healthcare in retirement rises to $185,500, Fidelity estimates

A 65 year old retiring this year should budget an average of $185,500 to cover health care and medical costs across retirement; a 7.5% jump from last year's projection.

The figure comes from Fidelity Investments' 25th annual Retiree Health Care Cost Estimate, which attributes the increase to broader trends across the health care sector, including rising treatment costs, higher utilization of care, and mounting expenses linked to chronic conditions.

"Financial planning for retirement is about more than reaching a savings target, especially as retirement itself continues to evolve," said Shams Talib, head of Fidelity Workplace Consulting. "Whether Americans fully stop working, phase into their retirement, or pursue new ways to stay engaged, health care consistently remains one of the largest expenses they will face. Providing a benchmark to consider can help them plan with purpose and more confidence."

The total breaks down into three components: Medicare Parts B and D premiums account for 45%, other medical expenses such as cost-sharing provisions, co-payments, coinsurance and deductibles for hospital and outpatient services make up 48%, and out-of-pocket prescription drug costs represent the remaining 7%.

Fidelity flagged a persistent misconception among clients approaching retirement: more than half of pre-retirees, 54%, wrongly assume Medicare will cover all of their health expenses. For advisors working with clients nearing Medicare eligibility, that gap in understanding around premiums, over-the-counter medications, dental and vision care, and long-term care remains a core planning issue.

"Medicare is a critical part of retirement health coverage, but it does not eliminate every health care expense," said Steve Betts, head of Fidelity Health. "This estimate helps illustrate why both pre-retirees and retirees alike will benefit from carefully considering out-of-pocket expenses and how they will pay for them as they build out their retirement income strategy."

Advisor toolkit

Fidelity is pointing advisors and clients toward starting health care planning earlier, arguing that additional lead time creates more room to prepare for anticipated costs and build financial flexibility into a retirement income strategy.

Health savings accounts remain a central tool in that approach for eligible clients. Fidelity noted HSAs carry a triple tax advantage: contributions can be made pre-tax, withdrawals for qualified medical expenses are tax-free, and investment growth within the account is also tax-free. Unlike other health benefit accounts, HSA balances roll over each year rather than resetting, letting savers apply funds to current expenses or bank them for future retirement health costs. Even so, Fidelity said 40% of Americans holding HSAs have not yet invested those balances, leaving potential growth untapped.

The firm pointed to its Fidelity HSA, Fidelity Medicare Services and Fidelity Workplace Consulting offerings, along with its network of Investor Centers, as resources advisors and employer clients can draw on when building out retirement health care strategies.

Client confidence

Despite the higher cost estimate, Fidelity said the release lands alongside encouraging data on retirement sentiment. Separate Fidelity research found that 72% of Americans expect to retire on their own terms, and close to three-quarters say they already have a plan in place to hit their retirement goals.

That confidence appears tied to awareness: 81% of respondents said they understand retirement health care costs to be high, while 26% named health care costs as a top challenge to their retirement savings.

Fidelity has produced the estimate annually since 2002 as a planning yardstick for the health care costs a retiree is likely to face even with standard Medicare coverage. This year's calculation assumes enrollment in Original Medicare (Parts A and B) plus Medicare Part D, covering premiums, copayments and other out-of-pocket costs for medical care and prescriptions. It excludes potential long-term care costs.