Data & Research March 28, 2007

Estimated $215,000 Needed for Retiree Health Care Costs

The average 65-year-old couple needs an estimated $215,000 to cover health care costs in retirement, $15,000 more than was predicted last year, according to research by Fidelity Investments.
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Brad Kimler, Senior Vice President at Fidelity Employer Services Company, attributed the increase to rising Medicare and health care costs and said the 7.5% increase kept in line with health care inflation last year. The annual Fidelity estimate that dates back to 2002 includes costs for Medicare Part B and D premiums – which are costs Medicare Part A does not cover – and supplemental insurance. The estimate does not account for long-term care costs.

The $215,000 is a 7.5% rise from Fidelity’s 2006 prediction that the same couple would need $200,000 to cover these costs but is below the 8.6% hike in 2005 – the greatest increase since Fidelity began making the predictions.

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Kimler said in a conference call with reporters that he does not expect the amount to drop. He also said health savings accounts (HSAs) are one of the most effective and tax efficient ways employers are addressing the need for health coverage in retirement.

According to a press release from Fidelity, some of the changes that have made HSA’s more attractive include:

  • The elimination of contribution limits that were previously tied to High Deductible Health Plan (HDHP) deductibles. In 2007, the new maximum contribution limits are $2,850 for individuals and $5,650 for families.
  • The ability for employers to initiate a one-time rollover of funds from an individual’s health Flexible Spending Account (FSA) or Health Reimbursement Arrangement (HRA) to an HSA.
  • Setting of annual statutory contribution limits earlier in the year (June 1) so employers can better prepare for annual enrollment.

Kimler said the reasons the $215,000 is startling are retirees do not consider health coverage in retirement as a primary planning objective and what they have accrued in their 401(k) accounts or other vehicles is much less than that.

Research by Fidelity also looked at how a $215,000 health care liability would affect retirees’ Social Security benefit, and found that a 65-year old earning $60,000 in the year he or she decides to retire can expect about half of his or her pre-tax Social Security benefit to be eaten up in health care expenses.

A summary of the study can be found at www.fidelity.com.

The Markets March 28, 2007

Money Managers Fret About Inflation, Softening Real Estate Market

The latest Russell Investment Group poll of U.S. money managers finds an optimistic outlook tempered by concerns about conditions that could cause a market stumble.
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A Russell news release said 22% of managers identified increasing inflation as their chief worry about the health of the equity markets. One in five cited geopolitical instability and 15% pointed to a softening real estate market.

“The overall market sentiment is bullish and tilted positively toward stocks, but these managers are nervous, cautious bulls,’ said Randy Lert, chief portfolio strategist, Russell Investment Group, in the news release. “They see risk, but there is a sharp divergence in opinion on where the source of market turmoil ultimately lies. Some managers are worrying over inflation while others fear a slowdown. The managers are hoping that economic growth will be neither too fast nor too slow.’

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Market Valuation Levels

In general, managers saw less value in the equities markets in the latest quarter, as the percentage of managers believing the market is undervalued dipped from last quarter’s all-time high of 37% to 24%.

After the February 27 stock selloff, 20% of managers pointed to a softening real estate market as the largest risk in U.S. equity performance over the next year, reflecting a substantial rise in concern from only 8% before. In a similar swing, sentiment toward the financial services sector became dramatically less positive when managers responded to the survey after the market decline – 61% of managers said they were bullish on this sector prior to February 27, as compared to 39% after.

According to Russell, the vast majority of managers (78%) are bullish on large-cap growth stocks. The annual returns for this asset style have trailed those for value stocks for a number of years and managers are anticipating a return to the mean, Russell said.

Also, managers are still most bullish on the health care and technology sectors, at 73% and 72%, respectively. They are most bearish on autos and transportation (60% bearish). Managers also maintain their enthusiasm for non-U.S. equities in developed markets, but they have dropped their bullishness toward equities in emerging markets by about 15 percentage points from last quarter.

Russell conducted the current Investment Manager Outlook between February 26 and March 5, 2007. More information is available at www.russell.com.

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