Experts Disagree on Retiree Health-Cost Estimate

April 7, 2006

Fidelity Investments says that a 65-year-old couple retiring now without employer-provided health benefits will need $200,000 for out-of-pocket healthcare expenses during retirement, according to data it released this past week. Yet many financial planners and other observers think that is way too little.

“People don’t have a clue as to what they’ll need in the future,” says Ron Roge, a wealth manager in Bohemia, N.Y. “The numbers are frightening.” He has increased the life-span expectancy of his clients to 100, for retirement-planning purposes.

The Employee Benefit Research Institute (EBRI), a research organization in Washington, estimates that people could need twice as much as Fidelity predicted because it based its numbers on life expectancies of 82 years for men and 85 for women.

Financial experts are concerned not only because longer life expectancies could make healthcare costs even more burdensome for many Americans, but also because Medicare premiums are expected to rise and more workers will probably lose their company benefits.

The EBRI estimates that a couple without employer-provided retirement healthcare coverage would need $216,000 if they live to 80. That number climbs to $444,000 if they live to 90 and $778,000 if they survive to 100. Most people underestimate how long they will live, said EBRI President.

A 65-year-old man today has a 50% chance of being alive at age 85 and a 25% chance of making it to 92, according to data from the American Society of Actuaries. A 65-year-old woman has a 50% chance of being alive at 88 and a 25% chance of living to 94.

The numbers are even higher for couples. If both are 65, they have a 50% chance of one living to 92 and a 25% chance of one surviving to 97.

The Fidelity prediction, which is updated annually by the financial-services firm, includes expenses associated with Medicare premiums and co-pays for exams and prescription drugs. It doesn’t include the cost of over-the-counter medicines, most dental care or long-term care.

It also doesn’t take into account that the premiums for Medicare are expected to rise, especially for high earners. Medicare beneficiaries with an annual income under $80,000 and $100,000 will pay 35%, and those with at least $200,000 income will be responsible for 80% of premiums.

Source: The Wall Street Journal, Jilian Mincer, April 2006.