Retirement planning gap persists
Although medical spending is widely recognized as a major retirement expense, one in five Americans told Fidelity they have never factored health-care needs into their retirement plans. Burns called this oversight a significant risk, warning that unanticipated bills can accelerate the drawdown of savings and increase the odds of outliving assets.
An analysis from the non-partisan Kaiser Family Foundation shows that health costs have routinely exceeded overall inflation for more than a decade, underscoring the importance of including realistic medical assumptions in financial models.
Why the estimate matters
Fidelity’s projection covers expenses not paid by traditional Medicare, such as supplemental premiums, prescription coverage and typical out-of-pocket charges. It does not include potential long-term care, dental or vision costs, which can add thousands of dollars to lifetime expenses. As a result, the figure serves as a baseline rather than a comprehensive cap.
To illustrate potential variability, Fidelity notes that the estimate assumes beneficiaries enroll in Medicare Parts A and B and purchase a Part D prescription plan and Medigap supplement. Individuals who opt for Medicare Advantage, delay enrollment or require extensive brand-name medications could face different totals.
Strategies to manage rising medical costs
Financial planners often recommend a multi-tiered approach to mitigate health-care inflation:
- Health Savings Accounts (HSAs) – Contributions are tax-deductible, earnings grow tax-free and withdrawals for qualified medical expenses are untaxed. Workers with high-deductible plans can accumulate HSA balances throughout their careers, then tap them in retirement.
- Budget segmentation – Some advisers allocate a separate “health bucket” within retirement portfolios, matching low-risk assets—such as Treasury Inflation-Protected Securities or short-duration bond funds—to projected medical spending.
- Delayed Social Security – Waiting until age 70 to claim benefits raises monthly payments, creating a larger guaranteed income stream that can offset unpredictable medical bills later in life.
- Long-term care insurance – While not part of Fidelity’s estimate, policies that cover nursing home or in-home care can protect assets from the potentially high cost of extended assistance.
Inflation and demographics fuel the trend
The Social Security Administration projects that the number of Americans aged 65 and older will reach 78 million by 2035, up from 56 million in 2020. As this population grows, demand for health services is expected to increase. At the same time, the Centers for Medicare & Medicaid Services reports that national health-care expenditures are projected to rise an average of 5.4 percent annually through 2032, exceeding general consumer inflation.
Those dynamics suggest that future editions of Fidelity’s estimate could continue to climb unless medical inflation slows or policy changes alter Medicare cost structures.
Action items for near-retirees
Fidelity urges workers approaching retirement to integrate health-care projections into broader cash-flow planning. Key steps include:
- Reviewing Medicare enrollment timelines to avoid late-sign-up penalties.
- Comparing Medigap and Medicare Advantage plans annually during open enrollment.
- Maintaining an emergency fund dedicated to unforeseen medical events.
Burns emphasized that “the sooner you address future medical costs, the more control you have over your overall retirement income strategy.”
For additional guidance on building a retirement budget that accommodates rising medical expenses, visit our Investing for the Future section.
INVESTING FOR THE FUTURE
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