Retired couples may need $220K for health care

WASHINGTON — After years of increasing health care costs, the outlook is improving for seniors worried about paying their medical bills during retirement.

For the second time in the last three years, estimated medical expenses for new retirees have fallen, according to a study released Wednesday by Fidelity Investments. A 65-year-old couple retiring this year would need $220,000 on average to cover medical expenses, an 8 percent decrease from last year's estimate of $240,000. The study assumes a life expectancy of 85 for women and 82 for men.

Fidelity attributes this year's decrease to several factors, including a slowdown in healthcare spending that hasn't rebounded with the economy.

“When times are tough people tend to cut back on health care expenditures,” said Sunil Patel, a senior vice president for benefits consulting at Fidelity. “I think what surprised many people is that in recent years, even as the economy recovered, you've still seen a fairly significant slowdown.”

Although fewer doctor's visits can help seniors save money, Patel stressed that skipping necessary care can lead to more serious health problems and higher expenses down the road.

The 2013 decrease is significant since Fidelity's estimates had increased 6 percent per year, on average, between 2002 and 2012. The estimate decreased only once before in 2011 due to changes in the Obama administration's health care overhaul, which have reduced seniors' out-of-pocket spending on prescription drugs.

Fidelity's projections assume that a 65-year-old couple retires this year with Medicare coverage and no additional coverage from former employers. The estimate factors in the federal program's premiums, co-payments and deductibles, as well as out-of-pocket prescription costs. The estimate doesn't factor in most dental services, or long-term care, such as the cost of living in a nursing home.

The company's projection has fallen 12 percent from its high of $250,000 in 2010. But Americans continue to drastically underestimate how much money they're likely to spend on health care during retirement. A recent poll of people in their 50s and 60s conducted by Fidelity found that nearly half of respondents think they will need just $50,000 to cover medical expenses.

Although many Americans underestimate the scale of medical expenses they'll need in retirement, the financial burden remains a serious concern.

A recent survey by Merrill Lynch found that health care expenses were the number one retirement worry among people preparing to retire. Three out of five retirees surveyed said they were forced to retire earlier than expected due to a health problem.

“This is a generation that is living longer than any previous generation and because of that longevity they have a whole new set of risks they're worried about,” said David Tyrie, managing director of Merrill Lynch's personal wealth and retirement business.

Here are some initial steps to help prepare for medical expenses during retirement:

— Talk to a financial planner: Experts agree there is no universal formula to plan for retirement costs. The amount of savings needed for medical care can vary depending on whether seniors continue working during retirement or retire before they become eligible for Medicare.

The Employee Benefit Research Institute, an independent nonprofit, conducts similar research to Fidelity, but doesn't focus on an average cost because there are so many variables that impact a retiree's circumstances. The group recommends working with a financial professional to develop a retirement plan that factors in medical bills.

“In general, people need to sit down and figure out what they want and talk to a financial planner to realize their goals,” says Paul Fronstin, EBRI's director of health research and education.

In its most recent estimate, EBRI projected that a couple with typical drug expenses would need $163,000 for a 50 percent chance of covering all medical expenses in retirement. They'd need $283,000 to have a 90 percent chance.

— Consider a health savings account: One of the best vehicles to begin saving for medical costs in retirement are health savings accounts offered by many employers and financial institutions. Workers can begin contributing to health savings accounts while they are younger and generally healthier. The money is invested tax-free and rolls over each year, regardless of whether you change employers. Unlike retirements accounts like IRAs and 401ks, the money is not taxed when it is withdrawn as long as it is spent on health care. Currently health savings accounts are only available to people enrolled in high-deductible health plans. These plans have lower premiums but a fixed deductible that must be paid out of pocket before coverage begins. They are generally a good idea for people in good health with few health care needs.

— Consider an annuity: For workers who don't have a health savings account an annuity can be another useful investment tool. Under a deferred annuity, a person can set aside a large amount of savings in return for a steady stream of payments in the future. The advantage of an annuity is that it provides a guaranteed minimum monthly payment, no matter what happens to the value of the principal investment.

A couple that knows they are likely to face $220,000 in expenses over their retirement could setup an annuity to provide about $11,000 a year over twenty years. The downside to an annuity, versus a healthcare savings account, is that withdrawals are taxed as income. Annuities can be very complex and investors need to do their homework about the related fees. For more info visit:

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