Underestimating Healthcare Costs in Retirement

Despite being concerned about covering the cost of healthcare in retirement, it's likely Americans are still underestimating the expense, according to a new report.

Although the vast majority of Americans are concerned about covering the cost of healthcare in retirement, they’re likely underestimating the expense, according to new research.

Fidelity Investments’ Retirement Savings Assessment study found that 84% of respondents don’t know if they’ll be able to cover healthcare costs in retirement. Even more worryingly, Fidelity suspects that the problem is even greater than many Americans think.

While 71% of respondents expect to have better-than-average health in retirement, Fidelity reports that the assumption is likely overly optimistic considering 35% of adults are obese and just 20% meet the overall physical activity recommendations of the Centers for Disease Control and Prevention.

In further contrast, while Fidelity has estimated the average couple could expect to spend roughly $220,000 in healthcare expenses during retirement, half of pre-retirees (ages 55-64) thought they would only need $50,000 for individual healthcare costs in retirement.

“Making smarter decisions about your health means you’re making smarter financial decisions, particularly when it comes to retirement,” John Sweeney, executive vice president of Retirement and Investing Strategies at Fidelity, said in a statement.

Fidelity’s report points out that many people don’t realize the significant connection between finances and physician health. More than half (53%) of respondents to a recent Fidelity survey said they would prefer to keep a financial fitness resolution rather than a physical fitness one, compared to 43% who said the opposite.

According to estimates from Fidelity, someone in poor health with a pre-retirement income of $120,000 may need an income replacement ratio as high as 88%, or $105,600, whereas if that person was in excellent health he or she might only need to replace 71%, or $85,200.

“Being in good health will probably mean you’ll be more active in retirement—and you’ll likely be able to spend more on discretionary expenses such as travel,” Sweeney said. “It’s also clear that doing all you can to stay healthy can make a big difference on essential costs as well, because you won’t have to spend that money on medical expenses. Simply put, not only can an apple a day keep the doctor away, it can very well help protect your retirement nest egg, too.”