Retiring couples need $215K for health costs

New research from Fidelity finds health care costs could eat up a bigger portion of Social Security benefits.

By Jeanne Sahadi, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- A word of warning: this article could adversely affect your health. It all depends on how sticker shock affects your system.

Since 2002, Fidelity Investments has estimated what the average person starting retirement will need to pay for healthcare costs. This year, the average amount for a couple, both age 65, is $215,000, up 7.5 percent from $200,000 last year. That assumes they will not have health coverage provided by a former employer.

On average, Fidelity anticipates health care costs will rise 7 percent a year in the foreseeable future, said Brad Kimler, Fidelity Employer Services Company senior vice president, in a conference call Tuesday. Health care inflation, he said, is due primarily to three factors: increased development of and use of new health-related technologies, advances in prescription drugs, and the aging of the workforce.

A couple who earned $60,000 a year before retiring can expect to devote 27 percent of their Social Security benefits to health care this year, and as much as 50 percent 16 to 18 years from now, according to Fidelity's estimates.

Fidelity researchers estimate the $215,000 will be eaten up by three costs:

  • Medicare Part B and D premiums, which account for 32 percent of the total
  • Medicare co-payments, deductibles, co-insurance and other cost-sharing items, which account for 35 percent
  • Prescription drugs, which account for 33 percent

Kimler cautioned that the $215,000 figure is just an average. Healthcare costs in retirement depend heavily on where retirees live, their health status and their life expectancy.

And, not insignificantly, Fidelity's estimate doesn't include the cost of long-term care, the need for which is less predictable than more general health care costs and can vary depending where you live. In Phoenix, Ariz., for instance, the cost of long-term care ranges from $27,000 a year for in-home care to $56,000 for nursing home care, according to the Met Life Institute. In Baton Rouge, La., by contrast, the range is between $17,000 and $40,000.

When making your calculations, consider that in an earlier survey of 2,000 full-time workers and nearly 900 retirees, Fidelity found that 22 percent of current retirees said they retired early primarily for health reasons, and 39 percent of all retirees said they were spending more in retirement than they anticipated.

That survey also estimates, based on the average savings reported by workers surveyed, that Gen Xers (age 25-42) should save 12 percent of their income every year if they want to replace 85 percent of their income in retirement, while Boomers (ages 43-61) should save 13 percent a year. Keep in mind however that increasing healthcare costs will eat up a bigger chunk of those savings.

And of course, the amount an individual really needs to save depends upon their particular circumstances. That's why Jack VanDerhei, a business school professor at Temple University and an Employee Benefit Research Institute (EBRI) Fellow, is developing a new methodology that takes into account six key elements that have a direct bearing on your savings rate. They are:

  • Your potential for a health crisis in retirement
  • Your longevity risks
  • Your investment risks
  • The spending habits of retirees who are generating the income you want your nest egg to generate (e.g., more than $40,000). In separate research, EBRI found that a majority of retirees say they spend 95 percent or more of their pre-retirement income.
  • The effect of annuitizing a portion of your nest egg when you retire, to insure you receive a steady source of income for life.
  • What you must save to achieve a 50 percent, a 75 percent and a 90 percent chance of reaching your goals. Most retirement savings calculators approximate a 50 percent probability.

(Find out more about his research click here.)

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.