Your retirement health-care bill: $225,000

By MSN Money staff

As long as you're budgeting for retirement, earmark about $240,000 to cover your out-of-pocket medical costs. That's how much a typical couple retiring in 2009 will spend on prescriptions, deductibles and Medicare premiums, according to the latest study by Fidelity Investments.

That amount, considered the largest single expense for most people in retirement, is a 6.7% jump from $225,000 in 2008. In the seven-year period that ended in 2009, retiree health care expenses have increased 50%, from $160,000 in 2002. And that amount does not include expenses such as over-the-counter medications, most dental services or long-term care.

Fidelity's study assumes that the couple will retire at 65, with a man living 17 years in retirement and a woman living 20 years. The estimate for health-care costs assumes that retirees do not have employer-sponsored retiree health care. It includes three typical costs: expenses associated with Medicare part A and B cost-sharing provisions; Medicare part D premiums and out-of-pocket costs; and expenses not covered by Medicare.

Only about a third of large employers now offer health benefits to retirees, down from 66% in 1988, according to the Kaiser Family Foundation.

"Health-care costs have the potential to significantly erode an individual's retirement savings," said Brad Kimler, a vice president for Fidelity Investments. "Knowing that these costs are only going to continue to increase, all Americans, even those as far as 20 years away from retirement, should be calculating and factoring lifelong health-care expenses into their overall financial planning."

Save thousands a year tax-free

One solution is to save specifically for health costs after retirement. A relatively new savings vehicle called a health savings account, or HSA, allows a family to make pretax contributions of up to , up from $6,150 in 2009. Earnings are tax-deferred. You'll pay no federal tax on withdrawals for health-related expenses after retirement, though the money can be used on a taxable basis for any purpose once you're past 65.

The catch? You have to buy a qualified health-insurance policy with a high deductible -- at least $1,100 for individuals and $2,400 for families in 2010 ($2,300 in 2009) -- either through your employer or on your own. Any contributions you don't spend accumulate each year, unlike the flexible spending plans that most employers offer. And HSAs are portable if you switch jobs.

Because of the high deductible, most HSA-compatible policies are much cheaper than a conventional counterpart.

A separate study released in 2008 by the Center for Retirement Research at Boston College estimated that an individual needs to enter retirement with about $102,000 budgeted just for health-care coverage, according to The Associated Press.

Updated Jan. 8, 2010