When planning for health-care costs in retirement, it pays to factor in a particular worst-case scenario: an earlier-than-anticipated workforce exit.
A new analysis from Fidelity Investments estimates that a healthy 65-year-old couple retiring this year will need $280,000 to cover their health costs in retirement. For individuals, the projection is $133,000 for a man and $147,000 for a woman.
Fidelity's calculations include premiums, cost-sharing provisions and out-of-pocket expenses associated with Medicare parts A, B, and D. The figures do not include other expenses such as over-the-counter medications, most dental services and long-term care, and do not factor in any employer-provided retiree health coverage.
"Actual assets needed may be more or less depending on actual health status, area of residence, and longevity," according to Fidelity.
The $280,000 estimate is up 2 percent from $275,000 last year, the smallest increase in the annual analysis since 2014. Part of the reason is that drug costs have, at least for now, leveled off, said Hope Manion, senior vice president with Fidelity Benefits Consulting.
"Offsetting that though, we're seeing in the actuarial data that people are continuing to live longer, " she said — which means additional years of expenses to anticipate.
Consumers planning for retirement can't expect such moderate cost increases every year. Health care will continue to be "a difficult pill to save for," Manion said.
Potentially more so if you leave the workforce early.
Fidelity's analysis counts on a key point: That you're retiring at 65, the same age you become eligible for Medicare. But the median retirement age is 62, a full three years earlier, according to the 2017 Retirement Confidence Survey from the Employee Benefit Research Institute.
Many of those exits are unplanned.
The institute estimates that 48 percent of retirees leave the workforce earlier than anticipated. New survey data from Fidelity, based on a poll of 1,000 recent retirees age 50 to 64, put those unexpected early exits at 58 percent.
"Those people were much less prepared on what the [health-care] costs would be, and how they would manage them," said Katie Taylor, vice president of thought leadership at Fidelity Investments.
For about a third of those early retirees, bridging the gap to Medicare has entailed spending more than $500 per month on insurance premiums. A quarter has drawn from Social Security income to pay for health care, and 15 percent, a 401(k) or retirement savings.
Plus many of those early workforce exits are tied to health problems for the retiree or a spouse, Taylor said. In other words, these aren't the typical "healthy" couples in Fidelity's headline $280,000 figure.
Step No. 1 to being better prepared: Don't ignore this looming issue.
"These are big numbers, and a concern is that a consumer will take a look at it and do the ostrich thing, and stick your head in the ground," Manion said. "We can't do that."
Kick the tires on your overall plan for financial security rather than worry about health costs, specifically, said certified financial planner Erika Safran, founder of Safran Wealth Advisors in New York City. Working with a financial professional can help you assess how well you've prepared, and if there are other plan elements to put in place.
"I don't think this is such a dramatic turn of news, that it should cause consumers financial discord," she said.
Assess any resources or benefits your employer might provide in retirement. In Fidelity's report, 6 in 10 early retirees still had access to employer-sponsored coverage, primarily as part of an early retirement plan (36 percent) or through a spouse or partner's employer (18 percent).
"A lot of people rely heavily on, is there a benefit from my employer to help me bridge the gap?" Taylor said.
Health savings accounts can be another important resource, Safran said.
The accounts, available to workers with high-deductible health care plans, offer a triple tax advantage, she said. Contributions are either pretax or tax-deductible, typically grow tax-free and can be withdrawn without incurring taxes when used toward qualified medical expenses.
"Not only can the funds be used for care, but they can also be used for premiums," Safran said. "That's an excellent way to save for future health care costs on a pretax basis."