Every year for the last 10, Fidelity Investments has calculated the cost of health care in retirement and concluded that it is rising astronomically and is going to eat up many people's savings, no matter how savvy their retirement planning.
This year, Fidelity figures that a 65-year-old couple retiring in 2012 will need $240,000 to cover medical expenses throughout retirement. This is a 4 percent increase compared to last year when the estimate was $230,000.
Here's what's included in the $240,000, according to Sunit Patel, senior vice president of Fidelity's benefits consulting business.
- Annual premiums for Medicare Part B, the portion that covers doctor bills. For most people that's $99 a month, but if you earn more than $85,000 a year as an individual or $170,000 as a couple, the cost starts to rise, reaching $320 per month for individuals with incomes higher than $214,000 or couples making more than $428,000.
- Annual premiums for Part D, prescription drugs. The average Part D premium, Medicare says, is $40 a month or $480 a year per person.
- Medigap plan. These plans from major insurers, including Aetna, Humana and Mutual of Omaha, run between $150 a month up to $200 a month, depending on where you live. Fidelity says that actuarially, the cost doesn't differ if you pick a Medicare Advantage plan or just pay the deductibles yourself. Although, if you self-insure and bet wrong, you could face dauntingly high costs.
This total doesn't include:
- Long-term care.
- Over-the-counter drugs or devices.
It also doesn't take into account government-paid Medicaid, Extra Help or employer-paid retiree health insurance. About 20 percent of retirees currently have retiree health insurance, but it is vanishing rapidly so don't count on it. Your annual income must be less than $16,755 for an individual or $22,695 for a married couple living together to qualify for Extra Help, which covers most Medicare fees and deductibles.
FIdelity calculates that the 65-year-old couple it is using as an illustration is likely to spend $10,476 per year initially on health care. In 20 years, inflation will drive the cost to about $25,000 a year. This isn't a scalable cost -- the less money you're living on in retirement, the greater percentage of it this represents. If in 25 years your Social Security has risen to $41,200 a year, the amount a typical Fidelity customer will likely earn, health care will eat up more than 60 percent. Ouch.
Patel says that saving enough to cover health care costs is the best way to keep you from having to eat dog food. If you are eligible for a health savings account, or HSA, which is limited to people with high-deductible plans, you get triple tax savings. Money goes into the account tax-free, it grows tax-free, and you don't pay taxes on it when you take it out to spend on health care. Obviously, pouring as much money as you can into an HSA is a great idea.
Otherwise, simply maxing out your workplace retirement accounts as well as putting money into an individual retirement account will go a long way toward covering what looks like a daunting bill.