Health costs are going up, stoking fears

Whenever we talk about people's biggest fears in retirement, two things always jump out: the fear of running out of money and health care costs.

A new analysis from Fidelity Retiree Health Care Cost Estimate says a 65-year-old couple retiring in 2016 will need a whopping $260,000 to cover health care costs in retirement. That's up 6 percent from last year and the highest estimate since the company began calculations in 2002, Fidelity says.

The estimate was $220,000 in 2014 and $245,000 last year. It is based on a life expectancy of 85 for men and 87 for women. The breakdown of those costs:

36 percent for monthly expenses associated with Medicare Part B and D premiums.

40 percent for Medicare cost-sharing provisions, including co-payments, co-insurance and deductibles.

24 percent associated with prescription drug out-of-pocket expenses (including co-pays and amounts not covered by Medicare Part D).

Fidelity for the first time examined the costs associated with long-term care, which it says could affect seven in 10 Americans who reach 65 in the next five years. Fidelity estimates that a 65-year-old would need an additional $130,000 to insure against long-term care expenses. That assumes that the couple is in good health and buys a policy with an $8,000 maximum monthly benefit. Keep in mind that most experts recommend also that a couple buy long-term care insurance before they turn 65, when rates are much lower.

Adam Stavisky, senior vice president of Fidelity Benefits Consulting, says the increases can be attributed to increased use and rapidly increasing drug costs. Those costs are going up partly because the introduction of generic drugs has slowed, he said.

Stavisky says Fidelity hopes that the latest numbers are a clarion call to people to be aware of the financial risks of health care costs.

For many, he says, the costs will be one of the biggest financial obligations they take into retirement. "Being aware of those obligations is critical." He says employers are also increasing their efforts to make their employees understand such obligations.