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By Adam Zoll and Christine Benz | 06-06-2013 12:00 PM

Encouraging Trends for Retiree Finances

Recent studies have found retirees' health-care expenses have decreased while their account balances have moved higher, but there's still a generational divide in terms of savings.

Adam Zoll: For Morningstar, I’m Adam Zoll and welcome to The Retirement Radar. Some new numbers suggest some improving trends for retirees, and here to talk about these and other trends is Christine Benz, Morningstar's director of personal finance.

Christine, thanks for being here.

Christine Benz: Adam, it’s great to be here.

Zoll: Fidelity released its annual estimate of retiree health-care costs recently, and it had some actually encouraging numbers in it.

Benz: It did. So it estimated that a couple retiring at age 65 would have approximately $220,000 in health-care costs over their lifetimes. That was actually an 8% drop from the estimate in 2012. So that's good news because we typically think of health-care costs as maybe running a little higher than inflation. Here was actually a lower number, and it was the only the second time since Fidelity began tracking this data that the costs have declined for this hypothetical couple.

So it's important to remember the assumptions that Fidelity is using when putting together these estimates. Importantly, the estimates don't cover some of the costs that typically are incurred by retiree households, so long-term care costs are not baked in here. Dental costs, which we've heard from some of our users can be high and unexpected cost in retirement, they're not here. Then out-of-pocket prescription-drug costs are not here either. But otherwise it's a pretty encouraging data point, I think, given that health-care costs are such a big part of retiree spending, and part of it owes to the fact that Medicare expenditures have actually declined. So that in turn flows through to Medicare participants who have lower coinsurance costs and other out-of-pocket costs.

Zoll: Some other encouraging numbers that came out from Fidelity recently involve retirement account balances. Can you talk to us about that?

Benz: Yes. So Fidelity has its hands on participant balances because the firm runs a lot of 401(k) money. Every year they put out estimates of what the typical participant balance looks like. What they found is the median balance is $80,000. That’s a high point since the market bottomed in March 2009. So that’s encouraging news. It’s particularly encouraging for people who are getting ready to retire, so people around 55, in that general age band. What they found is that the typical balance had actually doubled since early 2009 from about $130,000 to about $255,000. So very, very good news for people getting close to retirement. They’ve seen a really nice recovery in terms of the assets in their 401(k) plans.

What was a little discouraging is when you look at the small subsection of investors who pulled out in early 2009, moved to cash or moved out of stocks entirely, what you saw was that this group had a much less exciting increase in their balances. They, in fact, just saw a 26% increase in their balances since early 2009. So it's disappointing for this group. I think it's a good reminder about the importance of kind of setting an asset-allocation mix for your retirement plan and then not fiddling with it too much, and certainly not selling yourself out at the market bottom.

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