The average retiree is facing $173K in health care costs, Fidelity says

The financial cost of care for retirees has gotten higher than ever, with new research from Fidelity Investments indicating Americans are ill-prepared to cope with the financial toll of medication, medical care, and health insurance in retirement.

According to Fidelity's 24th annual Retiree Health Care Cost Estimate, released Wednesday, a 65-year-old retiring this year will need an average of $172,500 to cover health care and medical expenses throughout retirement. The figure marks a more than 4% increase from last year’s estimate and continues a steady rise since the company’s first projection of $80,000 in 2002.

The latest estimate from Fidelity, which assumes enrollment in Original Medicare Parts A and B and Medicare Part D, includes premiums, co-payments, and other out-of-pocket costs for medical care and prescription drugs.

As steep as it is, Fidelity's projection likely falls short of the real costs retirees confront today, as it still doesn't account for long-term care expenses.

The release comes as many Americans report declining confidence in their retirement prospects, with a record number approaching the traditional retirement age of 65.

Fidelity’s research highlights a persistent gap in planning: one-in-five Americans have never considered health care costs in retirement, and among Generation X, that figure rises to one-in-four. Seventeen percent of respondents across all generations said they have taken no action to prepare for health expenses in retirement.

“Year after year, so many Americans underestimate how much they’ll need to save to cover health care costs in retirement,” Shams Talib, head of Fidelity Workplace Consulting, said Wednesday.

While there's no denying the weight of health care costs on retirement savings, Talib stressed that pre-retirees and retirees "can take greater control of their financial futures by beginning the planning process as soon as possible.”

Encouragingly, health savings accounts are gaining traction as a tool for managing these expenses, with Fidelity reporting a 43% growth in total HSA assets and a 23% increase in accounts in 2024.

Still, only 23% of Americans Fidelity surveyed say they are contributing to an HSA to prepare for health care costs in retirement, and just three in ten are investing their HSA assets. Among those ages 55 to 64, only 15% have an HSA, and more than half are unaware it can be used as a retirement savings vehicle.

“HSAs are more than just a short-term savings tool – they can serve as a critical component of the retirement readiness equation,” said Steve Betts, head of Fidelity Health. “Our research consistently shows HSA users feel more prepared to cover health care expenses in retirement, yet many people don’t realize the full potential of the account.”

Recent studies from the Center for Retirement Research at Boston College and Jackson National Life Insurance Company suggest that while retirees are using various strategies to manage medical expenses, many remain vulnerable to the costs of long-term care.

The Jackson survey, which was released in January, found that 60% of investors are considering spending down assets to qualify for Medicaid, and almost two thirds of pre-retirees underestimate both the cost and likelihood of needing health care in retirement.

“Retirement should be a time for security and stability, however, our research shows many households may be unprepared for the realities of the healthcare challenges and expenses they will face,” Glen Franklin, assistant vice president of research, RIA and lead generation strategy for Jackson National Life Distributors, said at the time.