What will health care cost you in retirement?

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Myles Ma, CPFCSenior ReporterMyles Ma, CPFC, is a senior reporter and certified personal finance counselor at Policygenius, where he covers insurance and personal finance. His expertise has been featured in The Washington Post, PBS, CNBC, CBS News, USA Today, HuffPost, Salon, Inc. Magazine, MarketWatch, and elsewhere.

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Retiring couples should set aside $300,000 for health care costs, according to a recent analysis released from Fidelity Investments. That's 30% higher than a decade ago. A 65-year-old man will need $143,000 to cover health care costs in retirement while a woman needs $157,000, since women are expected to live longer, the analysis said.

Americans who are 65 or older qualify for Medicare, the federal health insurance program. It covers many health costs, but not everything. You still have to pay premiums, co-pays and deductibles.

What if you retire early?

Health care is often even more expensive for people who retire early, and the COVID-19 crisis has affected many Americans' retirements plans. According to the Fidelity survey, 82% of Americans say the pandemic has impacted their plans. For those within 10 years of retirement, one in five say they're accelerating their timeline to leave the workforce.

Early retirees have a few options to bridge the gap until Medicare. They may have continued health coverage through their old employer or their spouse's. They can also turn to the individual market on Healthcare.gov.

But these options come with costs as well.

"It all boils down to save early, save often and as much as you can," said Hope Manion, senior vice president and actuary for Fidelity Benefits Consulting.

How to save for health costs in retirement

Knowing how much you'll need in retirement is one thing. Saving it up is another. Health savings accounts can help save for out-of-pocket costs before and during retirement. Contributions, earnings and withdrawals to an HSA are all tax-free.

Money in HSAs is yours to keep. You don't lose it at the end of the year. Because of that, you can invest the money you contribute to help it grow until you need it in retirement.

Once you reach 65, you're no longer limited to spend HSA money on health expenses, so you can use it for everyday expenses in addition to Medicare premiums and other medical costs.

Looking for other ways to build your nest egg? Check out these five ways to save for retirement in five minutes or less.

Looking ahead

If you're still a long way from retiring, Fidelity's $300,000 estimate may not be a big enough target. While it represents only a 1.7% increase from 2019's estimate, we shouldn't expect costs to go down unless something changes. Health care and prescription drug prices keep rising and people continue to live longer.

Estimating health care prices in retirement for people who are in their 30s now is basically impossible, because if current trends continue, health care will eat up all of our spending. There has to be structural change to health care before that happens, Manion said. As we've seen in recent years, health care reform is a big part of the political agenda, but a solid solution hasn't emerged.

The $300,000 estimate is for the rest of the life span of a 65-year-old couple, which is about 20 years.

"We're not commenting on whether there's going to be an inflection point where the entire U.S. health care system is revamped some time over that horizon," Manion said.

Until that gets worked out, Manion said, "You just need to plan, save and invest as prudently as you can and as much as you can."

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