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A blog about living in and planning for retirement

Health Care in Retirement Costs More Than Most Homes

Every year, Fidelity Investments calculates the amount a recent retiree will need to cover medical costs throughout retirement. And almost every, the number rises. This year is no exception. According to a news release Fidelity issued Wednesday, a 65-year-old couple retiring in 2012 will need an estimated $240,000 to pay their medical costs–up 4% from last year’s $230,000 estimate. For comparison, the median price of a U.S. home is $180,000.

Many assume that Medicare fully covers retiree medical costs. But those in the federal health care program must pay premiums for coverage under Medicare Parts B and D, which, respectively cover outpatient care and prescription drug costs. In addition, Medicare only covers a portion of the full cost of care. As a result, those in the program are liable for co-payments and deductibles. (That’s why many spring for a Medicare Supplement policy–which, of course, means they must pay additional premiums.)

In 2011, Fidelity says, the estimate of future healthcare costs declined slightly, due to a one-time reduction in out-of-pocket expenses for prescription drugs, driven by health care legislation. Here are some of the other highlights:

  • Estimated health care expenses have risen an average of 6% annually since Fidelity’s initial $160,000 calculation in 2002.
  • A 65-year-old couple retiring this year with a household income of $75,000 should expect to devote 35 percent of their annual Social Security benefit (about $10,476) to health care expenses.
  • Of the $240,000 in expected expenses, an estimated 23% will go to prescription drugs, 32% for Medicare Parts B & D premiums, and 45% for co-pays, co-insurance and deductibles.

Even more sobering: The estimates do not include any costs associated with nursing home care.

According to Fidelity, Social Security’s annual average cost of living adjustment is 2.3%, or far below the  6% increase in retiree health care costs.

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About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.