The $1 million figure is thrown around by AARP and others as the amount of savings needed to replace between 70 percent and 80 percent of a person’s work income. But that’s a rough estimate and there are a lot of variables in retirement planning: How large is that income you hope to replace? How long will you live? Should you count your home equity as part of your savings if you’re not planning on selling your home? How will taxes and investment returns affect your retirement income? How will inflation affect your expenses? What happens if you suffer a sudden or long-term incapacitating illness?
The reality is that few retirees have saved anything close to $1 million. A 2016 BlackRock survey found that the average baby boomer between the ages of 55 and 65 had saved only $136,000 for retirement.
That means many people will need to stretch their savings and maybe relocate to the states where their money could last the longest.
GOBankingRates, a personal finance website, pegged Mississippi at the top of the list: In that state, $1 million could cover the needs of the average retiree for 26 years, 4 months. Hawaii is where you’re likely to blow through those savings the fastest ― in 11 years, 11 months.
The website determined the average total annual expenses for people 65 and older (counting groceries, housing, utilities, transportation and health care) and then multiplied total expenses by each state’s cost-of-living index to calculate the state-specific yearly cost. Housing is generally the big ticket item.
A new analysis from Fidelity Investments estimates that a healthy, 65-year-old couple retiring this year will need $275,000 to cover their health-care costs in retirement. That’s up 6 percent from the $260,000 estimate last year.
“This $275,000 is a brutal number,” said Adam Stavisky, a senior vice president at Fidelity. “In many ways, it’s annually a clarion call both for people to start understanding the obligations they will face in the future and how they will best prepare for them.”
Fidelity’s calculations include premiums, cost-sharing provisions and out-of-pocket costs associated with Medicare parts A, B and D — but does not include other health expenses such as over-the-counter medications, dental services and long-term care. “Estimates are calculated for ‘average’ retirees, but may be more or less depending on actual health status, area of residence and longevity,” according to the release.
Intimidating as retirement health-care figures may be, experts say there are a variety of ways to anticipate them in your overall retirement plan— and, potentially, reduce them.
Health savings accounts, or HSAs, can be a smart tool, Stavisky said. These accounts, which are paired with high-deductible health plans, have a triple tax advantage: Contributions are tax deductible, grow tax free and can also be withdrawn tax-free for qualified medical costs.
“Given that $275,000 figure, the odds of you having too much money in a health savings account are pretty limited,” he said.
Decisions you make around the timing of your retirementcan move the needle on costs, said certified financial planner Mychal Eagleson, president at An Exceptional Life Financial in Indianapolis.
Fidelity’s estimate assumes you retire at 65 — coinciding with Medicare eligibility. But many workers expect to stay in the workforcebeyond that, and retaining their employer-sponsored coverage could reduce costs. On the other hand, retiring before 65 could boost costs because you’ll need individual coverage in the marketplace to fill that gap, Eagleson said.
If your company offers retiree health benefits, pay attention to service dates and ages for eligibility, he said, as well as how those benefits change as you age. The share of Medicare enrollees with supplemental coverage from an employer-sponsored plan has been shrinking, with surveys estimating that only 16 percent to 25 percent of seniors had such coverage in 2014, according to the Kaiser Family Foundation.
“If they have a generous retiree health option, then that could give them a little more wiggle room,” said Eagleson.
Smart health choicesahead of and into retirementare another key element, said certified financial planner Carolyn McClanahan, director of financial planning for Life Planning Partners in Jacksonville, Florida. Investing in healthy lifestyle changes can help lessen costs, now and in retirement.
“What’s your lifestyle?” said McClanahan, who is also an M.D. “If you’re on the train to disaster because you’re overweight and you smoke, you’re going to incur higher costs.”
(Healthy habits may also help you boost retirement savings. Nearly two-thirds of workers say they’re contributing less to their 401(k)because of rising health-care costs, according to a Bank of America Merrill Lynch survey.)
Work with your doctors to find cost-effective ways to treat your ailments, and avoid tests and procedures that don’t help move that care forward, McClanahan said.
“You have to learn to become an empowered patient,” she said.