Retiree health expenses could approach $500,000

Workers living longer even as employers are reducing retirement benefits


So you're paying down the mortgage, socking money into an investment account and paring your spending to gear up for a few happy decades in retirement.

Not so fast.

There's another retirement expense that could eat into your nest egg, and many Americans are ill-prepared to face it.

With health care costs climbing and employers scaling back retiree benefits, the price of medical care could disrupt workers' plans for their golden years.

"The first thing that we often advise people to do is to start with a number that they think they want to have, as a lifestyle, during retirement," said Bryan Clintsman, a financial planner based in Southlake, Texas. "You need to add to that the cost of retiree health insurance on your own nickel."

That's especially important for employees who intend to leave the work force before age 65 and thus are ineligible for coverage from the federal Medicare program, Clintsman said.

But even older retirees with Medicare benefits can be surprised by health care costs.

Jere Francis, a Bedford, Texas, financial planner who has Medicare coverage himself, noted that recipients still must meet deductibles; cover co-payments for medical procedures and prescriptions; and pay monthly premiums for traditional benefits, drug coverage and, in many cases, supplemental benefits.

There's just one surefire way for workers to prepare for those expenses, Francis said: "Save more. It's plain and simple."

How much more?

A 65-year-old couple retiring today would need $200,000 to cover medical costs in retirement, according to a March 2006 estimate by Fidelity Investments.

That doesn't include over-the-counter medicines, dental care or long-term care in a nursing home. And the price tag would rise even further if the hypothetical man and woman lived past the ages of 82 and 85, respectively.

"The older you get, the more you're going to spend on health care," Francis said. "When I was 40 years old, I didn't even worry about it. Things hadn't started to break yet."

Of course, predicting health expenses in old age is tricky business for individual workers who have no idea whether they'll break a hip, suffer a stroke or battle a chronic disease decades from now.

While they can decide where to live in retirement and how much to budget for visits to the grandchildren, they have little control over illnesses that could deplete their savings quickly.

With so many variables, the size of the stash needed for health expenses could change substantially.

For example, a 2004 analysis by the Employee Benefit Research Institute in Washington found that a retiree would need to have a stockpile of anywhere from $59,000 to $458,000 - depending on several factors, such as how long the person lives and how much health care costs rise over time.

Yet most Americans have less than $25,000 in total savings, according to the Washington research group.

Some tips to keep in mind:

Know your retirement needs.

Too many Americans believe that they can retire young and live comfortably, even though they actually have no idea about their anticipated income or expenses, Clintsman said.

Add in the unexpected cost of health insurance, and "it really gets ugly quickly," he said.

"People need to get an idea of how much they should be saving," Clintsman said. "We kind of operate under this ignorance-is-bliss theory."

Retirement has to be a priority, as workers contend with many competing demands on their income, Francis said.

"By the time they end up taking care of their parents, putting the kids through college and everything else, some of them don't have much for themselves when it's retirement time," Francis said.

Work longer.

A few extra years of savings can go a long way toward fattening the retirement kitty. Perhaps more importantly, workers can hang onto their employer-sponsored health benefits as long as they're on the payroll.

Unless they want to risk going uninsured, those who retire before age 65 usually must buy their own coverage - with benefits easily costing as much as $1,000 a month for a married couple, Clintsman said.

Think twice about coverage from an employer.

Few workers can count on their employers to cover the cost of their post-retirement medical needs.

Just 33 percent of large companies offer retiree health coverage, down from 66 percent in 1988, according to a 2005 survey by the Kaiser Family Foundation and the Health Research and Educational Trust. And many of the employers who cover their retirees now have scrapped those benefits for future retirees.

Another survey by consulting firm Watson Wyatt found that a large majority of employers are planning some kind of cuts to retiree medical benefits in the next five years.

Among companies that do cover retirees, many are shifting a greater share of health expenses to the former workers, said Marianne Fazen, executive director of the Dallas-Fort Worth Business Group on Health.

Don't overestimate Medicare.

Although the government does cover much of retirees' health care, the benefits come with a price.

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