A 65-year-old couple retiring in 2012 is estimated to need $240,000 to pay for medical costs throughout retirement, according to a new study by Fidelity Investments. This estimate is up 4 percent from the 2011 estimate of $230,000, but still below the 2010 estimate of $250,000.
Expected health care costs for retirees decreased in 2011 largely due to Medicare changes established by the Patient Protection and Affordable Care Act. This health reform law will gradually close the Medicare Part D coverage gap, resulting in many seniors paying lower out-of-pocket costs for their prescription drugs. Additional preventative care services and a free annual wellness visit have also been added to Medicare at no cost to retirees.
This year's 4 percent increase is more modest than many previous years. Annual increases in retiree health care costs have averaged 6 percent since Fidelity made its initial calculation that a retired couple would need $160,000 to pay for health care expenses upon retirement in 2002.
Fidelity's calculation assumes that both members of the couple sign up for Medicare at age 65 and have no employer-provided retiree health insurance. Men are assumed to live for 17 years until age 82, while women are expected to spend 20 years in retirement until age 85. The calculation takes into account Medicare's cost sharing provisions including deductibles, coinsurance, and other likely out-of-pocket costs for Medicare Parts A, B, and D.
This study does not include the expenses associated with over-the-counter medications, most dental services, and long-term care. Retirement before age 65, living longer than expected, or the need for long-term nursing home care, which is generally not covered by Medicare, could all result in significantly larger health care costs.
Other researchers have come up with similarly large out-of-pocket cost estimates for retiree health care. A 2011 Employee Benefit Research Institute study found that a 65-year-old married couple with median prescription drug expenses throughout retirement would need $231,000 to have a 75 percent chance of covering all their medical costs after retirement in 2011. If they want a 90 percent chance of being able to pay for all their out-of-pocket costs they would need $287,000, EBRI found.
Fidelity's estimate assumes that the health care reform law will remain in place. Fidelity says their estimate could change if the U.S. Supreme Court decides to remove any of the 2010 health care law's provisions. Repeal of the Patient Protection and Affordable Care Act could mean a return to the coverage gap for Medicare Part D recipients, which would increase their out-of-pocket costs and the savings needed to cover their health care expenses in retirement. EBRI calculated that retirees with high prescription drug use would face 30 to 40 percent higher out-of-pocket health care costs if the health reform law is struck down. The Supreme Court is expected to rule on the constitutionality of the Patient Protection and Affordable Care Act in June.
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