Retiree health care costs are climbing: What advisors need to know

Health care costs for retirees just keep rising. A 65-year-old retiring in 2025 can expect to spend $172,500 on health care costs and medical expenses throughout retirement, according to a new survey from Fidelity. Financial advisors say ignoring that number can be a costly decision for retirees.

Since Fidelity began tracking retiree health care costs in 2002 — when the estimated expense for a 65-year-old was just $80,000 — projected costs have steadily climbed, far outpacing inflation. In the past year alone, Fidelity reported a 4% increase in total expected health care spending for retirees.

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The estimate includes out-of-pocket prescription drug costs, Medicare premiums and other medical expenses, such as co-payments and deductibles. Researchers did not include potential costs from other health care-related expenses, including over-the-counter medications, most dental services and long-term care.

Many retirees have found themselves ill-equipped to handle those costs, according to Shams Talib, head of Fidelity Workplace Consulting.

"Year after year, so many Americans underestimate how much they'll need to save to cover health care costs in retirement," Talib said. "We recognize the impact health care costs can have on retirement savings. With the right tools and guidance, pre-retirees and retirees alike can take greater control of their financial futures by beginning the planning process as soon as possible."

Clearing up Medicare misconceptions

Financial advisors say one of the biggest impediments to planning for health care costs in retirement is a misconception about the role of Medicare. Namely, that it will cover more medical expenses than it does.

"When I have these conversations with clients, especially those who are unprepared, the first step is just helping them slow down," said Melissa Cox, owner of Future-Focused Wealth in Dallas, Texas. "There's often a mix of embarrassment and fear. Many say, 'I didn't know this was something I needed to think about.' We walk through Medicare together, clarify what's covered and what isn't, and start looking at how their current financial picture can support a more realistic health care forecast."

That picture can start to look very different depending on how short they are of covering estimated medical expenses.

"Sometimes we have to pivot, adjust spending, reframe goals or revisit timelines, but that's okay," Cox said. "What matters most is giving people a sense of control over something that felt out of reach."

Encourage clients to plan early

Preparing for health care costs in retirement can be a relatively straightforward process as long as clients start early, advisors say.

Near-retirees have several cost-effective options to help cover expenses, including Medigap, long-term care insurance and life insurance with care-related riders. But for older retirees seeking coverage later, the process becomes more complex and often more expensive.

According to Andrew Crowell, vice chairman of wealth management for D.A. Davidson in New York City, waiting too long to sign up for certain plans can make them difficult to obtain at all.

"I've had some clients recently, in good health but in their 70s, who were looking for a little extra coverage. … Both of them [were] denied coverage because they couldn't pass a cognition test," Crowell said. "I have perfectly lucid conversations with them all the time, but the test that they were given was an individual over the phone reading a long list of words, and then they were asked to repeat back as many of the words they remembered hearing in the short space, and they froze up. They stammered through a few of them, and the insurance just denied them on that, and they have no aches, no pains, no typical aging stuff."

If those same clients had tried to sign up for policies in their 50s or 60s, the situation would have looked very different, Crowell said.

"If we had done that in their 60s or in their 50s — young, healthy — they would have qualified for a great preferred rate premium, and it wouldn't be an issue," he said. "Now they can try to reapply, but you know they're going to have the jitters from the minute they reapply, and they're probably going to freeze up again just because of that."

Crowell, who has been working in the industry for over 30 years, said insurance companies are becoming more cautious when assessing people due to increasing longevity.

When it's too late to start early

Starting early is one of the most effective strategies in financial planning — and health care planning is no exception. But even for clients who come to an advisor later in life, there are still viable options to manage rising medical costs.

"When I work with clients who are unprepared for these costs, the conversation often shifts to what they value most in their retirement plan," said Beau Kemp, a financial advisor at SwitchPoint Financial Planning in Lehi, Utah. "If the plan goes from looking good to looking constrained with the increased health care costs, we have to make some adjustments."

Exactly what those adjustments look like depends on the client's lifestyle preferences, Kemp said. Clients set on maintaining their current lifestyle may need to delay retirement as they build up their savings. Others who are more concerned with retiring at a specific age may have to scale back their spending to make room for medical costs.

"I rarely decrease the projected medical expenses in a plan because these costs are largely out of our control," Kemp said. "The focus needs to be on what we can control and if a client is comfortable with those adjustments. The goal is to create a plan that provides both financial security and peace of mind."