Study finds average retired couple will need $250,000 to cover medical costs

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, copayments and deductibles, and out-of-pocket prescription drug 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 — 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.

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 does not factor in most dental services or long-term care, such as costs from living in a nursing home.

The study also didn’t account for the health care overhaul President Obama signed into law this week

The law’s focus is expanding access to health care for 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 closing the gap is likely to yield only a very modest reduction in Fidelity’s $250,000 overall cost estimate. It’s 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.

Mark Jewell is a personal finance writer for the Associated Press.