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Health-Care Costs in Retirement Rise to $240,000

Americans are making a dangerous assumption: that their current retirement savings will be enough to cover health-care costs.

Adam Gault | Getty Images

Two new reports, released this week from Fidelity Investments and Nationwide Financial show Americans drastically underestimate how much they will spend out-of-pocket on health-care costs during retirement.

According to Fidelity, couples retiring this year will need, on average, $240,000 to cover medical expenses throughout retirement, or an out-of-pocket cost of up to $10,750 per year. This is 4 percent more than those who retired a year ago.

Most Americans, however, only anticipate spending about $5,621 a year, according to Nationwide’s survey.

“Many people don’t have a good grasp of actual health-care costs because they’ve only paid for a small component – the larger portion of those costs are provided through their employers. Most have never paid the full charge of a health-care bill,” said John Carter, president of Nationwide Financial.

Meanwhile, medical inflation has been persistently growing. Fidelity’s estimate was an increase of 6 percent annually since its initial calculation of $160,000 in 2002. Comparatively, the latest reading of the Consumer Price Index , which tracks overall inflation, was only up 2.7 percent.

Those nearing retirement “must understand that the cost of health care is expected to continue rising significantly in future years,” said Brad Kimler, executive vice president of Fidelity’s Benefits Consulting business.

“Medical inflation is outpacing salary increases and cost of living adjustments for many people,” Kimler added. Fidelity predicts health-care costs will be among retiree's largest expenses. Many are unprepared for this reality, and are opting to delay full retirement.

“Most definitely, I’m concerned. Drug costs are still going up, along with co-pays and deductibles as well,” said Florida resident Bill Macfarlane, who has chosen semi-retirement, while continuing to consult part-time.

He and his wife receive Social Security benefits, and have a Medicare insurance plan, but still worry health-care costs will sap their retirement savings.

The Macfarlanes are in like company. Three out of four Americans say health-care costs going out of control is among their top retirement fears, according to Nationwide’s survey.

This fear is coupled with some critical misconceptions about the government’s role in subsidizing these costs.

Americans anticipate Medicare covering 68 percent of their health-care costs in retirement, according to Nationwide. When pressed to explain this number, nearly three-quarters admitted to guessing.

In fact, Medicare only covers about 51 percent of the expenses associated with health-care services, according to the Employee Benefit Research Institute.

And that’s assuming Medicare will still be around. The U.S. government recently stated that the Medicare Healthcare Fund is headed for exhaustion by 2024. That’s fine if you retire now, but if you retire in 10 years — that’s another story.

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