insurance

Putting Retirement Health Costs in Context

First, consider that any cost projected out over several decades is bound to look daunting.

When I was raising my teenage son, a typical conversation would go like this:

Me: Don't you have homework?

Son: Mmmmm.

Me: Don't you have to write a ten-page paper plus study for a math test?

Son: [Grunt]

Me: Shouldn't you get started right now?

Son: [Door slam]

I'm reminded of our conversations when I consider retirement planners' admonitions to save more for retirement. The median retirement-account balance for people age 55 to 64 is $120,000—far short of Fidelity's proposed benchmark of eight times final salary, or the 25 times annual expenses or $1 million benchmarks put forth by other experts.

Now, Fidelity reminds us that we will need $220,000 per couple in retirement for medical costs alone, mostly to cover Medicare and medigap premiums and cost sharing. And the Employee Benefit Research Institute has noted that at 75, we'll likely spend more on health care than on food and clothing combined.

Feel like slamming a few doors? First consider that any cost projected out over several decades is bound to look daunting. Plus, Fidelity's $220,000 is already baked into its eight-times-final-salary benchmark. If you've saved at all for retirement, you've already started setting aside money toward health care costs. Also keep in mind that the annual amount—about $10,000 per couple in Medicare and medigap premiums and co-payments—"is not the budget-busting expense we often imply it to be" for reasonably affluent families, says Michael Kitces, of Pinnacle Advisory Group, in Columbia, Md. A couple with $3,000 per month in combined Social Security benefits plus $1 million in savings should be able to handle it easily, he says.

Further, know that projections can turn on a dime. A year ago, Fidelity calculated that a retired couple would have faced $240,000 in total health care costs. The new number factors in the effect of legislation that reduces out-of-pocket expenses for prescription drugs, as well as lower-than-expected spending among current retirees. Suddenly, you're in better shape.

As for the EBRI report that health care expenses will take a bigger bite out of your budget as you age, the same report shows that other spending categories take a smaller bite. Overall expenditures, on average, drop by 19% by age 75, compared with age 65, and they fall by 34% by age 85 (not necessarily because you're scrimping but because you become less active as you age).

Rude awakening. So everything's cool, right? Not surprisingly, the answer is no. Not only are most people behind when it comes to saving, but they also don't realize that they'll have to pay for Medicare. Nor are they aware of what Medicare does and doesn't cover, says Sunit Patel, senior vice-president of Fidelity's benefits consulting group. That means they're in for a nasty shock when they hit 65. (Test your knowledge of Medicare by taking our quiz.) Retirees with income below the median will struggle to make ends meet. And families who can't afford to buy full Medicare Part D and supplemental coverage "have very little to fall back on if they suddenly experience something catastrophic," says Sudipto Banerjee, a research associate at EBRI. Meanwhile, long-term-care costs—which are not included in Fidelity's health-cost projections—can cripple anyone's budget.

But context is everything. Rather than focus on a single number or a situation that may not apply to you, know your own risks and keep saving. Plan to buy Medicare Part D and supplemental coverage (or an all-inclusive Medicare Advantage plan) and pick up long-term-care insurance.

In short, do your homework—and be sure you're studying for the right test.

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