Even the rich fear retiree health costs

Even the affluent are spooked about their future health-care costs.

Merrill Lynch surveyed its clients with assets of more than $250,000. The company found that more than 3 out of 4 listed medical expenses as their No. 1 concern in retirement. About 2 out of 3 said they had not estimated retirement health-care costs. Not coincidentally, the vast majority plan to continue to work past retirement age.

Seniors spend about 10 percent more of their incomes on health care than working-age adults, even excluding prescription-medication costs. The elderly have greater medical needs, and their fixed incomes are less capable of absorbing rising medical costs.

Health care is a major retirement expense, and rising at a significantly higher rate than consumer inflation. According to Fidelity Investments, health-care expenses for those 65 or older rose more than 4 percent in 2010, compared with 1.1 percent for consumer prices overall. Retirees are paying 56 percent more for medical expenses than in 2002. Health-care expenses average $535 a month, second only to food costs.

The Center for Retirement Research at Boston College estimates that a married couple age 65 will spend $197,000 out of pocket for their remaining life expectancy. The figure rises to $260,000 when nursing care is included.

The good news is that health reform will close the “doughnut hole” in the Medicare Part D prescription drug benefit. Medicare beneficiaries pay out-of-pocket for medication after the initial coverage limit is met and before catastrophic coverage begins. In 2009, Medicare did not cover the first $295 of prescription expenses or those incurred between $2,700 and $6,154 annually. The latter gap gradually will close by the end of the decade.

The bad news is that Medicare inevitably will shift more costs to retirees in future years. Retirees spend about 10 percent of their income on health-care expenses. That is expected to rise to 19 percent by 2040.