High Cost of Health Care Robbing Retirement

How much do you need?

Experts estimate that if a couple retires today at age 65, the pair will need approximately $160,000 in savings to cover health-care needs, including insurance premiums and any out-of-pocket medical expenses. That figure does not include any long-term care costs such as living in a nursing home.

And, if you retire early, the costs could be even higher, because government-sponsored support such as Medicare isn't available until age 65. According to financial analysts, a couple retiring today at age 60 likely will need more than $200,000 to cover medical expenses in retirement.

A recent report in the Journal of Gerontology underscores the steep price seniors must pay if caught short when faced with high medical bills. The study claims that of the 1,500 couples interviewed (all age 70 or older), 45% said they lost more than half of their retirement savings when one spouse was diagnosed with a new medical problem such as high blood pressure, cancer, stroke, or arthritis. Likewise, the majority of single seniors interviewed--60%--said they lost at least 10% of their savings paying for treatment of pre-existing conditions.

Higher and higher

Unfortunately, these skyrocketing health costs aren't simply going through a temporary volatile phase. Statistics show the cost of medical care has outpaced inflation for the past 20 years, and prices are projected to increase as much as 15% annually. At that rate, retirees can expect to see their health-care costs double in just five years.

Adding to the mix, many baby boomers are nearing retirement. This large aging population is likely to have a tremendous effect on an already overwhelmed health-care industry. In response to this baby boom "bubble," more employers have had to review and restructure their retiree health insurance plans. Many retirees are finding they now must give more in co-pays or pay higher premiums to cover spouses and dependents. Some even have lost their employer-sponsored health insurance altogether.

What can you do?

No matter if you are going to retire within the next year or the next 20 years, the time to begin planning for how you will cover your health-care costs in retirement is right now, because the sooner you put some saving strategies in place, the better off you will be. Here are a few options to consider:

Reality check--To estimate your medical costs in retirement, you must first realistically evaluate your health. Take your relatives' health history into consideration as well. For example, if high blood pressure or heart disease runs in your family, pay extra attention to such things as hospital deductibles and drug costs, and plan accordingly.

Review employee benefits--If you still are working, review your employer's current health-care benefits to understand how they will perform after you retire. Employers may assist retirees in different ways, including paying outright for medical programs; not providing direct coverage, but offering programs to help employees save for health care; providing access to medical care at a group discount; providing a set amount of money to help fund health care; or offering a combination of these options.

How to save?--Consider starting a separate fund or account specifically for health-care costs, such as a HSA (health savings account). You can make tax-deductible contributions into an HSA, much like an IRA (individual retirement account). This account is joined with a high-deductible insurance policy; the amount you contribute is the same as the deductible, up to a limit. The minimum deductible allowed is $1,000 for singles and $2,000 for families, while the most you can contribute to the HSA is $2,600 for singles and $5,150 for families. Both of these amounts are increased by an additional $500 for those older than age 55.

You may use the money in this account to cover hospital, doctor, pharmacy, lab, and even dentist, orthodontist, and optician bills. You can withdraw money at any time tax-free, and unspent HSA funds also will compound tax-free. You can deposit money monthly over the course of a year or fund the account at any time up to April 15 of the following year.

Even if you currently are contributing to another retirement plan, such as a 401(k), you still can fund an HSA.

Medicare--Most people will qualify automatically for Medicare hospital insurance (Part A) when they reach age 65. This coverage is free if you or a spouse paid Medicare taxes while you were working. Medicare's medical insurance (Part B), however, requires a premium payment ($66 per month in 2004) to cover doctor's fees, outpatient hospital care, and other medical services such as physical therapy and some home health care. Be aware there is no annual limit on out-of-pocket expenses and neither Part A nor B covers drugs, dental care, routine physical exams, or hearing aids.

Medigap--A large number of retirees purchase Medigap insurance to cover what Medicare does not. Medigap policies are available at different levels and are priced according to the level of coverage you choose. Also, Medigap polices may differ from state to state, so be sure you understand what your state offers.

Medicaid is a federal/state program that will cover health costs for those who are unable to pay anything.

Research shows that 22% of Americans consider health care to be the most critical issue facing the country today, ranking ahead of the economy and currently running even with concerns about terrorism and national security. Remember, coverage of high health-care costs probably will not be an optional part of any retirement package. Review and revamp your plans now to ensure you'll have a healthy amount of health-care funds in retirement.

Published March 21, 2005