Retired couples may need $250,000 for health care

Relief to seniors facing high prescription drug costs is one of the first changes to come under the new health care overhaul. But ultimately that won't offset the relentless increase in retirees' medical expenses.

A couple retiring this year will need a quarter of a million dollars, on average, to cover medical expenses in retirement, according to a study to be released Thursday by Fidelity Investments.

The estimate is up 4.2 percent from Fidelity's projection last year. The Boston-based financial services company has updated its estimate annually since 2002 as part of its business helping employers design workplace benefits programs.

The study is based on projections for a couple of 65-year-olds retiring this year with Medicare coverage. The estimate factors in the federal program's premiums, co-payments and deductibles, as well as out-of-pocket prescription costs. The study assumes no employer provided insurance in retirement, and a life expectancy of 85 for women and 82 for men.

The estimate has risen 56 percent from Fidelity's initial $160,000 projection in 2002. The average annual increase has been 5.7 percent, so this year's 4.2 percent rise - from $240,000 last year to $250,000 - is modest.

But with broader inflation now near zero amid a recession, health care costs continue to rise faster than other expenses, said Sunit Patel, a senior vice president at Fidelity.

The findings illustrate the importance of factoring in health care alongside housing, food and other expenses in retirement planning.

"It turns out to be a surprise for many, and one of the largest expenses in retirement," Patel said.

The increase in this year's estimate was relatively small because a surge in patent expirations for brand-name drugs meant many cheaper generic versions reached the market, Patel said. That helped limit out-of-pocket prescription costs.

Fidelity's estimate doesn't factor in most dental services, or long-term care, such as costs from living in a nursing home. A 2008 study by Fidelity estimated a 65-year-old couple would need $85,000 on average to cover insurance costs for long-term care in retirement.

Thursday's study also didn't account for the health care overhaul that President Barack Obama signed into law Tuesday. Fidelity was updating its 2010 estimate before legislative details were clear, Patel said.

The law's focus is expanding access to people under age 65. But it also would benefit many retirees by gradually closing what's known as the "doughnut hole" coverage gap in the Medicare drug benefit. Seniors fall into that hole once they spend $2,830 per year. The legislation would begin narrowing the gap by providing a $250 rebate this year. The gap would be fully closed by 2020, when seniors would still be responsible for 25 percent of the cost of their medications until Medicare's catastrophic coverage kicks in.

Patel said the gap's closure is likely to yield only a "very modest" reduction to Fidelity's $250,000 overall cost estimate.

Fidelity's estimate is a projection of what an average couple would need. Actual costs will vary widely, depending on a couple's medical needs and how long they live.

The Employee Benefit Research Institute, an independent nonprofit, conducts similar research but, unlike Fidelity, doesn't focus on an average. That's because there are so many variables that many retirees' costs will end up far lower or higher than any average, said Paul Fronstin, EBRI's director of health research and education.

For example, EBRI estimated last year that a retired couple would need $416,000 for health care costs if their drug costs were far higher than average, in the 90th percentile. If that same couple lives longer than three-quarters of retirees, the estimate rises to $614,000.