The Problem With Average Estimates for Healthcare Costs in Retirement

Christine Simone
February 7, 2024

If you keep up with financial planning and retirement planning news, you may have seen that Fidelity recently came out with their 2023 Retiree Health Care Cost Estimate. The report states that a 65-year-old retiring this year can expect to spend an average of $157,500 in healthcare and medical expenses throughout retirement.

Estimates are a great starting place, but it’d be a big misstep to hold $157,500 as THE number for every 65-year-old retiring this year. The problem with average estimates for healthcare costs in retirement is exactly that: it’s an average estimate. Everyone has different needs, and several factors impact someone’s healthcare costs. For example, average estimates don’t take the following into account:

- Specific healthcare needs, such as medications or preferred doctors.

- Location (healthcare costs vary based on where you live).

- Personal preferences, like carriers, and risk tolerance.

In the examples below, we’re going to look at four real-life examples* of 65-year-olds' estimated healthcare costs based on the information they provided via a custom HealthPlanning Analysis. As you’ll see, once their specific healthcare needs, preferences, and financial goals are considered, their personalized cost estimate differs from the national average.

For the sake of comparison, we’ve broken down Fidelity’s estimate of how much a person retiring at 65 will need in retirement into three scenarios. If you consider that someone could live to 75, 85, and 95, Fidelity’s annual healthcare cost estimates would be:

  • 75: $15,750/year
  • 85: $7,875/year
  • 95: $5,250/year

Without further ado, let’s look at some real* Caribou cases!

*Names have been changed to protect confidentiality.

Meet Patricia!

Patricia is in good health, fills her prescriptions at CVS down the street, has three doctors that are important to her care, and prefers a low out-of-pocket maximum. ​​Based on her preferences, financial goals, and location, her optimal health plan option is Original Medicare (rather than Medicare Advantage). Looking at plans in her county, her estimated annual healthcare costs in retirement, according to our HealthPlanning Analysis, are $3,348. While this amount will likely fluctuate (which is why we recommend annual reviews!) you can see that this number is below all longevity estimates we derived from Fidelity’s total estimate. 

The difference between her costs and the 30-year longevity estimate is $1,902/year - or $57,060 total! - over the course of Patricia’s lifetime in cost differential. That’s money that could be allocated elsewhere, like gifting to grandchildren or taking multiple vacations over her retirement. 

Meet Tony!

Tony is living with health conditions, visits several doctors and wants to continue seeing them, takes prescription medications, and wants a health plan with a low deductible. Based on these preferences, financial goals, and location, his optimal health plan option is Original Medicare. Looking at plans in his county, his estimated annual healthcare costs in retirement, according to our HealthPlanning Analysis, are $4,831. 

Again, this amount will likely vary each year, but you can see that this number is below all longevity estimates we derived from Fidelity’s total estimate. 

The difference between his costs and the 30-year longevity estimate is $419/year - or $12,570 total! - over the course of Tony’s lifetime in cost differential. 

We’ve seen two examples where the retiree opted for Original Medicare, and yet their costs are different by about $1,500 per year. Ready to see an even larger differential in costs? Let’s look at what retirees on a Medicare Advantage plan will spend in retirement.

Meet Jerome

Jerome has health conditions, takes a few prescription medications, and doesn’t mind spending a moderate amount on premiums and out-of-pocket costs if it means all his current doctors, prescriptions, and pharmacies are in-network. Based on these preferences, financial goals, and location, his optimal health plan option is a Medicare Advantage plan carried by Aetna. Under this plan, his estimated annual healthcare costs in retirement, according to our HealthPlanning Analysis, are $12,070. 

For Jerome, Fidelity’s estimate is actually lower than his personalized estimate. His costs are above all longevity estimates we derived from Fidelity’s total estimate. 

The difference between his costs and the 30-year longevity estimate is $6,820/year - or $204,600 total! - over the course of Jerome’s lifetime in cost differential. 

In this scenario, following a general estimate would cause Jerome and his advisor a lot of stress as they realize that Jerome doesn’t have nearly enough saved for healthcare costs. This becomes an even bigger problem once Jerome moves to a fixed income.

Meet Yvonne!

Yvonne is living with health conditions, has an upcoming procedure, and takes over ten medications. She also prefers to have a low monthly premium and a higher deductible. ​​Based on these preferences, her financial goals, and her location, her optimal health plan option is a Medicare Advantage plan carried by AARP. Under this plan, her estimated annual healthcare costs in retirement, according to our HealthPlanning Analysis, are $11,010. 

Fidelity’s estimate is lower than Yvonne’s personalized estimate. Her costs are above all longevity estimates we derived from Fidelity’s total estimate. 

The difference between his costs and the 30-year longevity estimate is $5,760/year - or $172,800 total! - over the course of Yvonne’s lifetime in cost differential. 

For Yvonne (and countless other Americans) using a general estimate could spell disaster for her retirement years. This is just one of many reasons why a personalized HealthPlanning Analysis is crucial not only for a more accurate financial plan but to also ensure retirees have what they need for a healthy, fulfilling retirement.

Final Thoughts

The takeaway here is not that general estimates are "wrong," but that healthcare costs vary significantly from person to person — even on the same health plan! This is because of several factors that need to be considered, such as health needs, preferences, goals, location, and more.

General estimates can be a good place to start, but if you want to accurately plan for healthcare costs to make sure clients' financial plans are as comprehensive as possible, personalized HealthPlanning Analyses are a must. If you want to see HealthPlanner in action, a member of our team would be happy to show you!

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