One popular estimate for retiree health care costs may be misleadingly huge, if a new study is accurate.
For more than two decades, Fidelity Investments has released an annual Retiree Health Care Cost Estimate. It estimates the average 65-year-old couple retiring now and enrolled in Original Medicare can expect to spend $315,000 on health care and medical expenses during their remaining years.
Fidelity’s estimate is based on a hypothetical scenario rather than actual spending data. New research from the Center for Retirement Research at Boston College, based on real-world data, arrives at a much lower figure for out-of-pocket costs: $67,260, on average, for a 65-year-old couple who may be using a variety of options for health care coverage.
The CRR study found that these out-of-pocket costs represent about one-fifth of total retirement health spending. The remainder is covered by Medicare (64%), Medicaid (10.7%) and other insurers (3.7%). Medicare is the federally-run insurance program for people older than 65 and generally requires patients to pay premiums and deductibles. Medicaid is a federal-state assistance program for low-income patients of all ages run by state and local governments within federal guidelines, that generally covers all costs.
CRR’s study is based on Medicare and Medicaid records as well as a long-running nationally representative health and retirement survey. That information was supplemented by insurers’ data for people with Medicare Advantage plans, the other type of Medicare coverage along with Original Medicare. Hence, it covers a wider range of scenarios than Fidelity’s estimate and is based on the actual spending of real people.
One drawback of CRR’s study, however, is that its data sources only include information through 2012. That means they don’t account for the past decade of inflation or changing health care trends.
For a direct comparison, in 2012, Fidelity estimated its hypothetical couple would need $240,000 to cover medical expenses through retirement. That is still 3.5 times CRR’s estimate.