[March 18, 2014]

Fidelity® Study Shows 84 Percent of Americans Concerned about Health Care Costs in Retirement

Research from Fidelity Investments'^® Retirement Savings Assessment study¹ finds Americans are increasingly concerned about health care costs in retirement, with 84 percent of respondents wondering whether they will be able to cover them. The problem may be even greater than they think: almost three-quarters (71 percent) of respondents expect to have better-than-average health in retirement-an overly optimistic assumption for many, since the Centers for Disease Control and Prevention report that 35 percent of U.S. adults are considered obese² and only 20 percent meet the Centers' overall physical activity recommendations².

Fidelity's research³ suggests many Americans greatly underestimate the amount of savings they may need to cover health care costs in retirement. A study last year of pre-retirees (ages 55-64) found that nearly half (48 percent) of respondents believe they will need about $50,000 to pay for their individual health care costs in retirement. In contrast, Fidelity's annual Retiree Health Care Cost Estimate, which has estimated the cost of healthcare in retirement every year for more than a decade, has found that the average couple could expect to spend more than $220,000 in healthcare expenses over the course of their retirement.

In addition to underestimating these costs, many people are unaware of the long-term financial impact that making positive health decisions can have. When asked which resolution is more important to keep-financial or physical fitness-a recent Fidelity study⁴ revealed that 53 percent of respondents said they'd prefer to keep financial fitness resolutions, compared to 43 percent opting for physical fitness. However, many don't realize the significant connection between the two-and the importance of focusing on both-especially when it comes to health care costs in retirement.

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

Addressing the retirement health care challenge

Fidelity's Retiree Health Care Cost Estimate tells only part of the story. With longer life spans, medical costs rising faster than general inflation, declining retiree medical coverage by private employers and funding challenges for Medicare and Medicaid, managing health care costs is expected to remain a critical challenge for retirees for some time to come. That's why the importance of maintaining a healthy lifestyle cannot be understated.

For example, Fidelity estimates an individual with a pre-retirement income of approximately $80,000 and in poor health⁵ may need an income replacement ratio as high as 96 percent of his or her pre-retirement income each year, or approximately $76,800. Conversely, that same person in excellent health might need just 77 percent, or $61,600, a nearly 20 percent difference. To illustrate this, Fidelity has created an iteractive chart and infographic that demonstrates the connection between health and retirement income needs.

To help plan for retirement healthcare costs, Fidelity suggests the following:

• If possible, increase your savings level. Set an annual total savings goal of 10-15 percent or more of your income (including individual and employer contributions). Contributing the appropriate amount to a retirement savings account is a key aspect of reaching your savings goals, whether through a workplace savings account, such as a 401(k) or 403(b), or an Individual Retirement Account (IRA), or both. Also, consider investing a portion of any raises, bonuses or tax refunds into savings and increasing contributions to savings plans by 1 percent every year to reach this goal.
• Make saving automatic. Think about putting savings on autopilot by signing up for automatic withdrawal plans through your financial services provider, or turning on the automatic increase program in your 401(k), if offered.
• Contribute to a health savings account (HSA). Individuals who are offered a qualifying high-deductible health plan (HDHP) through their employer should also consider saving in a health savings account. HSAs offer a "triple tax advantage," meaning contributions and investment earnings accumulate tax-free and continue to roll over from year to year if not spent. Distributions from HSAs for qualified medical expenses are not subject to federal taxes. Take advantage of all available company contributions to cover out-of-pocket health care costs, and invest any remaining balances for future qualified medical costs, including those in retirement. For questions about how much to save in an HSA or how to invest balances over the long-term, contact your provider for guidance.

Fidelity Offers Resources to Help Meet Retirement and Health Savings Goals

For additional information, Fidelity offers educational articles, including "Retirement roadmap: 12 rules of the road," which outlines key steps in planning this financial journey, "Five ways to protect your retirement income," providing rules of thumb on protecting savings and income for those approaching retirement, and a Retirement Roadmap special edition devoted exclusively to retirement planning. For additional information on Health Savings Accounts, Fidelity offers "Three Healthy Habits for Health Savings Accounts" and Fidelity's workplace education program, Plan for Life, provides HSA account holders with resources to assist them with contributions and investment guidance related to the product.

About Fidelity Investments

Fidelity Investments is one of the world's largest providers of financial services, with assets under administration of $4.7 trillion, including managed assets of $2.0 trillion, as of February 28, 2014. Founded in 1946, the firm is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing and many other financial products and services to more than 20 million individuals and institutions, as well as through 5,000 financial intermediary firms. For more information about Fidelity Investments, visit www.fidelity.com.

Investing involves risk including the risk of loss.

Fidelity Investments and Fidelity are registered service marks of FMR LLC.

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Fidelity Investments Institutional Services Company, Inc.
500 Salem Street, Smithfield, RI 02917

National Financial Services LLC, Member NYSE, SIPC
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681739.1.0

© 2014 FMR LLC. All rights reserved.

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¹ SOURCE: The Retirement Savings Assessment (RSA (News - Alert)) was the result of a national online survey of 2,265 working households earning at least $20,000 annually with respondents age 25 and older from June through October, 2013. Data collection was completed by GfK Public Affairs and Corporate Communication using GfK's KnowledgePanel®, a nationally-representative online panel, which is not affiliated with Fidelity Investments.

² SOURCE: Centers for Disease Control and Prevention, September 2012, May 2013.

³ SOURCE: The HSA survey was conducted by GfK Public Affairs & Corporate Communications from February 4th to 20th, 2013. The study was conducted among a nationally representative sample of 1,836 U.S. adults ages 25-64 with a household income of $25,000 or more. Respondents also have primary or shared responsibility for household financial decisions and receive healthcare benefits through their own or their spouse's employer.

⁴ SOURCE: The 4^th annual New Year Financial Resolutions Study was a telephone survey conducted among two national probability samples, consisting of 2,027 adults, 18 years of age and older. Interviewing for this CARAVAN® Survey was completed on November 7-11, 2013 by ORC International, which is not affiliated with Fidelity Investments.

⁵ SOURCE: Based on Retirement Savings Assessment research. The working assumption for "poor health": five chronic conditions during retirement and five prescription medications needed.

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