Couples Need $220k for Retirement Medical Expenses

Many people drastically underestimate how much they should save to cover health care costs during retirement, according to a new estimate of retirement health care costs.

Couples will need approximately $220,000 to cover medical expenses throughout their retirement, according to calculations by Fidelity Investment.

Health care expenses are among the largest retirement costs, and many are concerned that they won’t be able to pay — health problems are the largest retirement worry, even among the affluent, according to a Merrill Lynch study.

The current $220,000 estimation for a 65-year-old couple is an 8% decline from last year’s $240,000 estimate. Since 2002 when Fidelity started calculating an annual estimate of medical expenses for retirees there has only been one other year when the estimate declined. In 2011, a one-time adjustment from Medicare changes reduced out-of-pocket expenses for prescriptions for many seniors.

“While lower, this year’s estimate is still daunting for many retirees, and it will consume a considerable amount of a couple’s retirement savings,” Brad Kimler, executive vice president of Fidelity’s Benefits Consulting business, said in a statement. “It is extremely important that health care costs are factored into retirement savings strategies today so that retirees can be prepared to pay their medical bills throughout retirement.”

However, many people underestimate how much they should save to cover health care costs during retirement, according to a recent Fidelity survey. Nearly half of pre-retirees (ages 55 to 64) said they will only need $50,000 to pay for health care costs in retirement. The truth, though, is that for every year since 2006 the annual retiree health care cost estimate has exceeded $200,000.

“Creating a plan and starting to save as early as possible are two key aspects of a successful retirement savings plan,” added Kimler. “But it’s also important to identify a specific retirement income stream to address health care costs in retirement. Having assets that are earmarked for health care expenses will help ensure retirees can cover these costs when they arise, as well as help manage their overall retirement savings portfolio.”

According to Fidelity, payment changes and demographics have contributed to the lower estimate this year. Recently Medicare spending per enrollee rose significantly lower than historical increases — 1.9% from 2010 to 2012 compared to an average of 7% from 1985 to 2009.

The new, younger retirees, as part of the Baby Boomer generation, reduce the overall health costs since they have lower health care expenses than the older beneficiaries, according to the Fidelity report.

“What is surprising is that while the economy has strengthened, per-enrollee trends remain modest compared to historical rates,” continued Kimler. “Whether these trends are sustainable depends largely on the ability of the private health sector to find efficiencies in the delivery system.”