Fidelity is stating that average couple will need $240,000 at the point of retirement to cover their Health Costs in retirement.

Are they right or are they wrong or are they just really close?

The answer comes down to how you look at the data (our original post on the subject).

First off, Fidelity has given some details to how they figured the amount. They are stating that they are calculating for Medicare Part B & D premiums and then the rest of the costs will have to come out of pocket of the couple. They are assuming a 6.6% rate of inflation on overall health care costs compounded annually and that the monies earmarked for these costs will earn a compounded rate of 4% throughout retirement.

Finally, they are using life expectancies of 82 for a male & 85 for a female, while claiming that the couple is in average health with no chronic conditions.

Now, what we do know as a fact is that Medicare Part B, for the average person turning 65 in 2012, is $99.90 a month or $1,198.80 per person. We also know by estimates that the average Medicare Part D premium is roughly $400 per year per person.

That leaves us with $1,598.80 per person. If we then compound this number by 6.6% for 18 years for the male and 21 for the female the total the couple will spend in retirement to cover their Health Care expenses is $125,565.

All this couple will need as assets to earmark at retirement, which should be considered as today, will be roughly $57,306- this amount will also have to earn a 4% compounded rate for the next 20 years too.

Now, this seems a little a low, but what we also know is that there will be other costs that can be covered that we can factor in.

We know that there are deductibles and co pays for Medicare Parts A & B (please see Is Medicare Free?), we know that there are expenses if our hospitalization stay is too long or if we need more blood for our procedures. We also know that there are excess charges & costs that are just not covered, like co pays & deductibles for Medicare Part D.

We also know that most of these costs listed above can be covered by a MediGap Policy. These policies  were created specifically to help fill the in “gaps” that original Medicare had created and for some reason the number provided by Fidelity doesn’t seem to include them

MediGap Plans are administered by private insurance companies who have been approved by Medicare to be able to have the opportunity to sell MediGap Policies in each state. The rates, term & conditions of these Policies will fluctuate between each company selling them and each state they are sold in (to see if your state is the cheapest or the most expensive click here).

So with all of this information, how do can we find out what these costs of MediGap Policies and the remaining out of pocket costs will be?

By turning to HealthView Services, we can learn that the National Average cost for a MediGap Plan C Policy is roughly $1,500 per year per person and the National Average out of pocket costs is roughly $700 per person.

These two costs now bring our total to $3,398.80 per person at age 65. If we then compound the numbers by 6.6% for 18 & 21  years we will total $301,901 and all that this couple will need at retirement/today is roughly $197,525, at a 4% compounded interest rate.

But, even that number seems too low when comparing it Fidelity, so let’s look at HealthView Services’ own RetireMark Software to see what is typical for a 65 year average healthy couple who happens to reside in Ohio & earns less than $170,000 annually (Yes, where you live, what health conditions you have & how much you make are as important to figuring out what your costs will be as when you retire & when you expect to die).

The first thing we learn is that the actuarial tables from this decade peg “average healthy persons” on a different life expectancy as someone who has say Cancer. A male should expect to live to age 88 and a female to age 90.

With this new lease on life their costs are calculated to be $492,850.00 throughout retirement and the monies need at the point of retirement/today is $278,399.92 (please note that there has to be a compounded 4% earned each year on these earmarked assets)

If we are to use Fidelity’s life expectancies in RetireMark’s Software the total costs are $305,200.00 and the amount needed at retirement/today is $198,505.77 at a compounded 4% interest rate for this couple who happens to reside.

The side note to this is that RetireMark’s Software is assuming that the user will purchase a MediGap Policy to help offset Health Care Costs while Fidelity assumes that these costs will be paid for by the user.

So if we are to assume that the couple retires today, is in average health, lives in a state that is closest to the National Average, earns less than $170,000, will purchase a MediGap Plan C Policy, will earn a compounded 4% interest rate on monies earmarked for this expense over the course of 20 years and will never ever ever ever have a health condition throughout retirement while having the male pass away at 82 and the female at 85 then the Health Care Number is more like $198,505.77.

If you are not like this, well then your number is going to be different.

How different?

If you have average health, live in Hawaii, have a Fidelity life expectancy and your income is under $170,000 then the total amount spent in retirement will be roughly $244,640.00 and the amount needed at retirement/today is $159,522.35

If you happen to be a couple who has an income defined by Medicare to be over $214,000 per year, happen to live in Florida, both live until age 90 where the male has High Cholesterol and the female has Type II Diabetes your Health Care number will look a lot like $801,162.00 throughout retirement and you will need $442,509.87 at retirement/today.

So is the number really $240,000?

Maybe, if you are a couple who are both aged 65 today, you both have no health conditions and will not have any for the rest of your lives, you will earn less than $170K per definition of Medicare annually as income for the rest of your lives, you will reside in Vermont, and for the male you will have a life expectancy of 82 and for the female you will have a life expectancy of 84.

Then your number will be $251,154

It’s great to know that something that is so personalized like a person’s health can now be broken down to one generic number that everyone who is “average” should use.

Sort of makes financial planning even simpler to do now too.