Health Care Costs Could Consume Retiree’s Income

According to Fidelity Investments, a 65-year-old couple retiring in 2012 is estimated to need $240,000 to cover medical expenses throughout retirement. This represents a 4% increase from last year, when the estimate was $230,000.

Fidelity has calculated an annual estimate of medical expenses for retirees for more than a decade. For many Americans, health care is likely to be among their largest expenses in retirement. The estimate, which is calculated by Fidelity’s Benefits Consulting business, does not include any costs associated with nursing home care and applies to retirees with traditional Medicare insurance coverage.

The estimate has increased an average of 6% annually since Fidelity’s initial calculation of $160,000 in 2002, with the exception of 2011 when the estimate declined $20,000. That one and only decrease in the history of the estimate was due to a one-time adjustment driven by Medicare changes that reduced out-of-pocket expenses for prescription drugs for many seniors. This year, health care expenses are rising once again.

“Today’s workers must understand that the cost of health care is expected to continue rising significantly in future years,” said Brad Kimler, executive vice president of Fidelity’s Benefits Consulting business.

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“Medical inflation is outpacing salary increases and cost of living adjustments for many people. Until that situation changes, it is critical that individuals include health care costs in their retirement savings strategies today so they can be prepared to pay their medical bills throughout retirement,” Kimler said.

Many retirees rely on Social Security benefits as their primary source of income. For a 65-year-old couple retiring this year on a $75,000 annual household income, annual Social Security payments will be approximately $29,970.

Fidelity compared Social Security’s average cost of living adjustment (2.3%) against an assumed average annual increase of health care costs for retirees nationally (6%). The comparison found that 65-year-old couples retiring this year with a $75,000 household income should expect 35% of their annual benefit (about $10,476) could be needed for health care expenses today. In 15 years or by 2027, their allocation of Social Security benefits going toward health care expenses is likely to almost double, to 61% of a $41,205 annual Social Security payment, or about $25,000 a year.