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Health Care Costs for Retirees Skyrocket

Retirement planning must include health care component.

As if there weren’t enough financial pressure on older workers approaching retirement, here’s another: A new study says that, over the course of their lives, a 65-year-old couple retiring this year can expect to pay about $240,000 out of pocket for their health care needs, even with Medicare coverage.

That’s a 50 percent increase from 2002, when retiree health care costs were predicted to total $160,000, according to the study by Fidelity Investments, which on March 26 released its annual estimate on the cost of retiree health care. Rising costs associated with health care and related technology were given as reasons for the increase. The estimate for 2008 was at $225,000.

Astonishingly, the $240,000 that today’s retirees are estimated to pay out over their life span—17 years for men, 20 years for women—doesn’t include dental care, long-term care, and vision and hearing services, the study said. Each of those expenses is not covered by Medicare.

Mike Shamrell, a spokesman for Fidelity, says that the increase in health care costs breaks down as follows:

  • 29 percent from premiums for Medicare Parts B and D;
  • 41 percent from Medicare copayments, deductibles and benefits not covered by Medicare; and
  • 30 percent from prescription and over-the-counter drug costs.


“We try to make people aware of these expenses so they’re not blindsided in retirement and have part of their savings taken to cover this,” he says. “People overestimate what’s going to get covered by Medicare.”

Although Fidelity’s estimate of $240,000 for retiree health care costs may seem high, it is lower than predictions by the nonprofit Employee Benefit Research Institute in Washington, D.C. The organization calculates that a 65-year-old couple retiring in 2006 (the latest year available) may need as much as $295,000 to cover premiums for health insurance and out-of-pocket expenses during their lifetime. A couple who lived to age 95 could spend up to $550,000.

“It’s important that people think about how their health costs are likely to change when they retire,” says Gerry Smolka, a strategic policy adviser at AARP. “What we spend for coverage while we are working is likely not the same as what we will be spending once we retire. Recognizing this, people need to think about how changing health expenses will fit into their retirement savings and budgets. That means learning about Medicare and what it covers.”

Mark Bonhard, a certified financial planner and investment adviser representative at Dawson Wealth Management in Cleveland, says that retirement planning must include a health care component to be effective. The expense of long-term care alone could push a couple toward financial ruin.

“Long-term care is not covered by Medicare, but many think it is, so they don’t do any planning for this,” he says. “It can be as much as $80,000 a year. That could be a huge burden for a couple when one of them needs long-term care.”

Health care costs are already a burden for many older people, even without the expense of nursing home care or assisted living. A Harvard study led by David Himmelstein, an associate professor of medicine, found that nearly half of the estimated 1.5 million personal bankruptcies filed each year in the United States result from high health expenses. And 76 percent of the filers are covered by insurance at the onset of illness, the study noted. An update to that study, released in 2005, is expected soon.

“A lot of people are going to be in financial trouble in the years ahead,” Himmelstein said, citing the Fidelity estimate of retiree health care costs. “Very clearly we’re going see a huge increase in the number of people who can’t pay for all the commitments in their lives—medical care or otherwise—unless we have a substantial change” in the nation’s health care system.ystem.

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