Americans are badly mistaken when it comes to their expectation for healthcare costs in retirement, according to research by Fidelity.

The Fidelity Investments 21st annual Retiree Health Care Cost Estimate revealed that Americans on average estimate a couple retiring this year will spend $41,000 on health care expenses in retirement. That is $274,000 short of the actual $315,000 estimate, according to Fidelity’s analysis.

This year’s estimate is up 5% from $300,000 in 2021and has nearly doubled from $160,000 in 2002, when Fidelity first began to estimate retiree healthcare costs. The estimate, Fidelity explained, assumes both members of the couple are enrolled in traditional Medicare, which between Medicare Part A and Part B covers expenses such as hospital stays, doctor visits and services, physical therapy, lab tests and more, and in Medicare Part D, which covers prescription drugs.

For single retirees, the 2022 estimate is $150,000 for men and $165,000 for women. Last year’s estimates were $157,000 for women and $143,000 for men.

In addition to being out of touch with this year’s healthcare expenses for a retiring couple, 68% of respondent also believe that associated healthcare costs will remain under $25,000.

Fidelity said once respondents were informed of the estimated healthcare cost for a retiring couple this year, 70% indicated that they felt unprepared. The research further showed that the number of people who felt prepared increased when the person had a health savings account (HSA). Nearly half (47%) of HSA holders felt prepared for their healthcare retirement expenses, compared to 27% of people who did not have an HSA. Fidelity noted that an HSA allows account holders to pay for qualified medical expenses in a tax-advantaged way, now through retirement.

The research found that the three features cited most by respondents for opening an HSA are the combined health plan and HSA contribution from their employer offered the best value (56%); it helps reduce current healthcare expenses (53%); and their employer gives an annual contribution (50%).

Fidelity said it is critical for older Americans as they approach retirement to understand the potential costs they may face in retirement, as well as how Medicare can help them. The research found that 57% of baby boomers incorrectly think a person can elect to enroll in Medicare at age 62 and receive reduced benefits, when in fact the enrollment age is 65.

It also found that 41% of boomers believe there are out-of-pocket limits for Medicare coverage. But retirees need to enroll in Medicare Supplement (Medigap) in order to limit their out-of-pocket expenses. And 40% believe Medicare will pay for them to stay in a nursing home. But Medicare does not cover long-term care or custodial care, “and most nursing home care is custodial care, meaning help with everyday activities like bathing, dressing and bathroom use,” Fidelity noted.

“Even as many Americans look to turn the page on the events of the last two years, staying informed on potential future health care costs should remain a top factor when planning for retirement,” Hope Manion, senior vice president, Fidelity Workplace Consulting, said in a statement.

The survey, conducted February 28 through March 4, included 2,022 adults 18 and older.