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Retirement Health Cost Estimates Hit New High

A new report estimates that health care for a 65-year-old couple retiring this year will cost 6% more than a year ago – the highest estimate since 2002.

According to Fidelity’s Retiree Health Care Cost Estimate, a 65-year-old couple retiring in 2016 will need an estimated $260,000 to cover health care costs in retirement, a 6% increase over last year’s estimate of $245,000 and the highest estimate since calculations began in 2002.

The 6% increase in this year’s estimate was attributed to several factors, including an uptick in the utilization of medical services and rapidly rising drug costs.

The estimate applies to retirees with traditional Medicare insurance coverage and provides a general idea of the monthly expenses associated with Medicare premiums, Medicare copayments and deductibles, and prescription drug out-of-pocket expenses.

What Are the Odds?

In October 2015, the nonpartisan Employee Benefit Research Institute (EBRI) estimated that a 65-year-old man needs $68,000 in savings and a 65-year-old woman needs $89,000 if each has a goal of having a 50% chance of having enough money saved to cover health care expenses in retirement. If either instead wants a 90% chance of having enough savings, $124,000 is needed for a man and $140,000 is needed for a woman, though that analysis did not factor in the savings needed to cover long-term care expenses.

For a married couple both with drug expenses at the 90th percentile throughout retirement who want a 90% chance of having enough money saved for health care expenses in retirement by age 65, EBRI noted that targeted savings increased from $326,000 in 2014 to $392,000 in 2015.

For Fidelity’s analysis, the estimate based on a hypothetical couple retiring in 2016, 65 years old, with average life expectancies of 85 for a male and 87 for a female. They are calculated for “average” retirees, but, as Fidelity notes, may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes. The Fidelity Retiree Health Care Costs Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government’s insurance program, Original Medicare.

That calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care.

Long-Term Cares?

While Medicare covers many health-related expenses in retirement, long-term care costs are only covered by Medicare in limited circumstances. Fidelity estimates that a 65-year-old couple would need $130,000, in addition to savings for retiree medical expenses, to insure against long-term care expenses. This assumes the couple is in a good health and purchases a policy with $8,000 monthly maximum benefit, with three years of benefits, and an inflation adjuster of 3% per year.

The report notes that long-term care expenses are based on many factors, and the need for long-term care insurance (and level of coverage) is highly dependent on individual circumstances.

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