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Health Costs for Retirees Decline

Emily Brandon

A 65-year-old couple with median prescription drug expenses will need $227,000 to have a 75 percent chance of covering their Medicare premiums and other out-of pocket medical costs after retirement in 2012, according to a recent Employee Benefit Research Institute report. People who retire in 2012 are estimated to need $4,000 less the $231,000 new retirees required in 2011 largely because provisions of the Patient Protection and Affordable Care Act of 2010 reduced out-of-pocket prescription drug costs for retirees.

[See 10 Great Senior Discounts.]

You'll need to save more, of course, if you want more certainty of being able to cover your retirement medical bills. Retired couples who want a 90 percent chance of being able to pay for their out-of-pocket medical costs will need to have $283,000 upon retirement in 2012, down from $287,000 in 2011. Retirees who are willing to live with a 50 percent chance of covering their health care costs would need $163,000 in 2012, a $3,000 decline from 2011.

Retirees who have above average prescription drug needs will also face higher out-of-pocket costs. A couple retiring in 2012 with prescription drug expenses in the 90th percentile is estimated to need $317,000 to cover out-of-pocket medical costs. But retirees who use a lot of prescription drugs also get more benefits from the Affordable Care Act. Expected out-of-pocket costs for retirees in the 90th percentile of prescription drug spending dropped $15,000 from $332,000 in 2011.

[See How to Pick a 2013 Medicare Part D Plan.]

"The main reason for the decline in needed savings is related to slight improvements (reductions) in the projected costs of prescription drugs under Medicare Part D," according to the EBRI report. "The Patient Protection and Affordable Care Act is reducing cost sharing in the Part D coverage gap, or so-called donut hole."

A single man with median prescription drug costs needs $105,000 to have a 75 percent chance of covering his medical costs throughout retirement, down from $107,000 in 2011. Single women retiring in 2012 need to save even more: $122,000. "Because women have longer life expectancies than men, women will generally have larger expenses than men to cover health insurance premiums and health care expenses in retirement," EBRI found. "Women will need greater initial savings than men even when both set the same goal." For singles who want a 90 percent chance of being able to pay for health care throughout retirement the savings necessary jumps to $135,000 for men and $154,000 for women.

Retirees could need even more money for health costs if they end up requiring long-term care or retire before age 65. Seniors could also end up using less savings if they work past traditional retirement age and get health care benefits through their employer.

[See How to Get Retiree Health Insurance Before 65.]

A 2012 Fidelity Investments study came up with a similarly large estimate of retiree health costs. Fidelity Investments calculated that a 65-year-old couple retiring in 2012 would need $240,000 to pay for medical costs throughout retirement. This estimate is 4 percent higher than the 2011 calculation of $230,000, but still below the 2010 estimate of $250,000. The calculation includes deductibles, coinsurance, and other likely out-of-pocket costs for Medicare Parts A, B, and D. Like the EBRI study, the Fidelity estimate does not factor in the cost of long-term care.

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