Save for health care costs in retirement? Won't Medicare take care of that?

A 65-year-old couple retiring this year can expect to spend an average of $315,000 in health care and medical expenses throughout retirement, according to the 21st annual Retiree Health Care Cost Estimate from Fidelity Investments.

“Even as many Americans look to turn the page on the events of the last two years, staying informed on potential future health-care costs should remain a top factor when planning for retirement,” said Hope Manion, senior vice president for Fidelity Workplace Consulting.

Research from HealthView Services supports the same conclusion. Although six in 10 American workers are “significantly concerned” about their ability to cover future health care expenses, only 26 percent have calculated the monthly income they will require to address their needs in retirement.

The company highlighted seven specific reasons why health care needs to be incorporated into retirement planning:

1. Driven by health care inflation, costs will be greater at the end of retirement than at the beginning. Total lifetime health care costs for a healthy 65-year-old couple retiring this year are projected to be $572,960 in future dollars. This includes premiums for Medicare Parts B and D, supplemental insurance and dental insurance, as well as out-of-pocket costs related to hospitalization, doctor visits, tests, prescriptions drugs, hearing services, hearing aids, vision and dental.

2. Healthier, longer lives will mean higher health care costs in retirement. As with all aspects of retirement planning, expected longevity provides the optimal framework for projecting costs. Although annual expenses will be greater for retirees in poor health, lifetime expenses generally will be higher for healthier retirees because they will, on average, live longer. A 55-year-old woman with type 2 diabetes (projected to live to age 80) will pay an average of $3,470 more per year in medical-related expenses than if she were healthy. However, because of a shorter expected lifespan, her lifetime health-care expenses will be considerably lower than her healthy counterpart.

3. Health-related behavior modifications can significantly affect longevity and health-care costs. RAND Corporation data show that half of U.S. adults suffer from a chronic condition such as high blood pressure, type 2 diabetes, obesity or high cholesterol. Of this population, many fail to adhere to their physician’s treatment protocols. In fact, as many as half do not even take their medications as prescribed.

Health conditions — and whether they are properly managed — directly correlate to expected longevity and retirement health-care expenses.

4. Health-related investment choices can make costs more manageable. To ensure that sufficient funds will be available, product choice, portfolio mix and decumulation strategies are critical for long-term financial stability.

Selecting financial products that help reduce Medicare surcharges in retirement and taking advantage of strategies such as health savings accounts (for those in high-deductible plans), creates opportunities to maximize retirement income. Some of these products are Roth 401(k)s, Roth IRAs, certain life insurance and annuities products, and health savings accounts (HSAs).

5. Modest investments while employed can reduce the burden of health care costs in retirement. As with most aspects of retirement saving, modest ongoing contributions into investment products, 401(k) plans or HSAs add up. In general, the longer investors have to benefit from compounding returns, the better.

6. Meeting income replacement ratio (IRR) goals will cover some, but not all, future health care costs. Those on track to meet an IRR of 80 percent already are on their way to addressing a portion of future health care costs. Current industry-standard IRRs assume that health care outlays during employment and retirement are equivalent.

7. One-time investments can help address retirement health care costs. For some, making additional weekly or bi-weekly contributions may be the best solution to address future healt care needs. Others may prefer a one-time lump-sum investment to fund future expenses that enables them to benefit from compounding returns

“By highlighting opportunities to plan for and manage retirement health-care expenses, advisors play a key role in helping clients take action,” the HealthView report concluded. “Simply sharing health care cost projections in the context of the retirement planning process is a powerful driver of increased savings and offers an opportunity to discuss strategies to manage — and even reduce — these costs.”