The amount of money retirees need to set aside for medical expenses dropped 8 percent this year, though the dollar figures are still considerable.
According to new data from Fidelity Investments, a 65-year-old couple retiring in 2013 will need $220,000 to cover medical expenses throughout retirement compared to $240,000 last year. The study assumes a life expectancy of 85 for women and 82 for men.
The decrease is significant since Fidelity's estimates had increased 6 percent per year, on average, between 2002 and 2012. The estimate decreased only once before in 2011 due to changes in the Obama administration's health care overhaul, which have reduced seniors' out-of-pocket spending on prescription drugs.
Americans continue to drastically underestimate how much money they're likely to spend on health care during retirement. A recent poll of people in their 50s and 60s conducted by Fidelity found that nearly half of respondents think they will need just $50,000 to cover medical expenses.
Fidelity's projections assume that a 65-year-old couple retires this year with Medicare coverage and no additional coverage from former employers. The estimate factors in the federal program's premiums, co-payments and deductibles, as well as out-of-pocket prescription costs. The estimate doesn't factor in most dental services, or long-term care, such as the cost of living in a nursing home.
Fidelity has calculated an annual estimate of medical expenses for retirees since 2002. For most Americans, health care costs will be the largest expense during retirement. The estimates provided by Fidelity don’t include any costs associated with nursing home care and they apply to retirees with traditional Medicare insurance coverage.
Medicare per enrollee spending increased at a rate of only 0.4 percent in 2012, in line with relatively small increases in spending in recent years. Spending per enrollee rose just 1.9 percent between 2010 and 2012. This is significantly lower than historical increases, which have averaged 7 percent annually from 1985 to 2009, according to Fidelity.
A number of factors contributed to the recent decrease in spending per enrollee, including the economic downturn that began in 2008, which led to a decrease in utilization of health care services as many Americans were faced with financial challenges. Another contributing factor: smaller payment increases to providers, like hospitals and physicians.
As Baby Boomers retire, they bring a large influx of younger enrollees into the Medicare population, which reduces the overall average age of participants. Younger retirees tend to have lower health care expenses than older beneficiaries.
Although spending per enrollee has declined, increases in aggregate Medicare spending have grown at a faster rate due to a larger number of beneficiaries.
While the current trend of lower spending per enrollee has had a positive impact on Medicare costs, the growth in Medicare enrollees over the next few years is expected to strain Medicare-related resources.
A recent survey by Merrill Lynch found that health care expenses were the number one retirement worry among people preparing to retire. Three out of five retirees surveyed said they were forced to retire earlier than expected due to a health problem.
"This is a generation that is living longer than any previous generation and because of that longevity they have a whole new set of risks they're worried about," said David Tyrie, managing director of Merrill Lynch's personal wealth and retirement business.
The Associated Press contributed to this report.