You probably already realize that a significant amount of your spending in retirement will go toward health care. But you may still be surprised when you see the actual average price tag.
Fidelity Investments' latest annual estimate for what an average couple will spend in retirement on health care totals $230,000. That figure may have fallen 8% from last year's quarter of a million dollars, but don't expect many more declines in the future.
Mmm ... doughnuts ...
We can't even credit the estimate's drop to lower health care prices. Instead, it owes largely to recent reform legislation that fills in the Medicare "doughnut hole."
Previously, Medicare coverage for seniors' prescription drugs suffered from a great big gap. Medicare would cover annual expenses up to $2,830, and then kick in again for any out-of-pocket expenses exceeding $4,550 -- but for any spending between those two sums, seniors were on their own. The reform will gradually phase out the doughnut hole; in the meantime, the government made a deal with big drug companies to offer discounts to Medicare recipients who fall within its boundaries.
While this reform is great in some respects, it's not all rosy for companies -- or individuals. Abbott Labs (NYSE: ABT), for example, expects to lose $200 million in revenue because of the reform laws. The folks at Bloomberg estimated late last year that big pharmaceutical companies would offer more than $2 billion in discounts under their deal with the government. In 2009, Pfizer (NYSE: PFE) led the pack in drug spending for customers falling into the doughnut hole, at $469 million, followed by AstraZeneca (NYSE: AZN) with $400 million and Bristol-Myers Squibb (NYSE: BMY) at $368 million.
Prepare ... and hope
The best way to deal with this massive looming expense is to prepare well for it, by saving and investing effectively for retirement. It's fair to hope that further reforms will lighten our health-care costs, but it's not prudent to count on that. The closing of the doughnut hole is great, but drugmakers will likely find ways to compensate for that lost revenue -- perhaps, in part, by raising whatever prices they can.
Those of us who look forward to retiring comfortably need to keep health-care expenses in mind when planning ahead. Most of us will need large nest eggs to live off. In the meantime, though, at least we can all raise a doughnut to a rare year in which estimated health-care costs actually fell.
