Your Retirement Health Care Tab: $260,000

The average couple retiring today at age 65 will need $260,000 to cover medical costs in retirement, according to an annual estimate by Fidelity, released Tuesday. The figure shows you don't need to be particularly sick to rack up huge medical bills over decades in retirement.

Last year’s estimate was $245,000. The 6% increase falls within the typical range for health care costs, which historically have risen faster than overall inflation. The pace of growth slowed during the recession but has since rebounded.

Whether the growth rate is 3%, 6% or more, the hard truth is this: “You’re unlikely to over-save for health care expenses in retirement,” says Adam Stavisky, senior vice president, Fidelity Benefits Consulting.

To put it another way, getting your medical coverage in retirement through Medicare doesn't mean it won't cost you anything. Most beneficiaries pay both premiums and out-of-pocket costs for covered services under the government health insurance program for those 65 and older and younger people with certain disabilities.

Plus, Medicare doesn’t cover everything—routine dental work and hearing aids are among the services and devices that are typically excluded. Medicare also doesn’t cover most long-term care, such as home health aides and non-rehabilitative stays in nursing homes or assisted living.

For the first time, Fidelity this year estimated the amount that the average 65-year-old couple would need to have to cover long-term-care expenses: $130,000 on top of the $260,000 in medical expenses. These figures are all in today’s dollars and represent the after-tax amounts that an average couple will need to have saved by age 65 to cover lifetime medical and long-term-care expenses.

Fidelity’s projection assumes that the male partner dies at age 85 and the female at age 87. Plenty of people will live beyond these averages, potentially adding to their tab.

The $260,000 medical-cost estimate assumes the couple has Original Medicare from the government, not a private Medicare Advantage program. The figure includes premiums for Part B doctor coverage and Part D drug coverage, which together represent 36% of the total. Another 24% comprises cost-sharing requirements for drugs.

Forty percent represents cost sharing on medical expenses, such as deductibles and co-insurance, or the percentage of the medical bill that’s the patient’s responsibility. That 40% also includes services and devices that Medicare doesn’t cover, such as hearing aids and eyeglasses.

The $260,000 average holds whether the couple has bought Medicare supplemental insurance or not, Fidelity says.

Plan F is the most comprehensive Medigap policy, as these supplement plans are also known, and it picks up most of the costs that original Medicare doesn’t. Whether the couple pays Part F premiums or simply pays out-of-pocket for services without a supplement plan, the lifetime total remains the same on average, says Sunit Patel, senior vice president, Fidelity Benefits Consulting, who crunches the numbers each year.

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But that doesn’t mean that the costs of having Medigap or not will be the same for any particular couple: Someone who gets a devastating diagnosis and doesn’t have supplemental coverage will potentially incur higher costs than average. Retired individuals who sign up for Original Medicare should buy a Medicare supplement, because the government program doesn't have a cap on the maximum costs you might have to pay out of pocket, the Fidelity officials say.

By contrast, the company doesn't have a recommendation on whether the average couple should buy long-term-care insurance or not. One issue is that there is far greater variability in factors including the need for care and costs around the country, Stavisky says.

People who haven’t saved enough for retirement—and let’s face it, that’s most of us—needn’t despair. Working longer can boost savings and delay the drawdown of those savings for retirement expenses. And while not all of our health is under our control, exercise and eating in moderation will pay dividends down the road.