Planning for Health Care in Your Retirement


Start saving now because it's more costly than you might think

With the oldest baby boomers turning 60 this year, millions of Americans may soon reach the sobering conclusion that they haven't set aside enough money to cover their health-care costs in retirement.

Increasingly, companies are eliminating retiree health benefits or cutting back coverage. Even if you are one of the fortunate few to have an employer-sponsored health plan, you may encounter significant cost-sharing. And if you plan to retire before you become eligible for Medicare, you may have to pay the entire premium on your own.

"Just like you're not going to get the gold watch, you're not going to get the benefits that your father and grandfather got" when they retired, said Tracey A. Baker, vice president of Cooper, Jones & McLeland Ltd., a financial planning firm in Fairfax, Va.

Baker, a member of the Financial Planning Association (FPA), said health-care costs are often retirees' second largest expense after the mortgage. Yet most Americans aren't as knowledgeable as they need to be about what their insurance covers and what Medicare does and does not cover.

In fact, a 2005 survey co-sponsored by FPA and Aetna Inc. found that people vastly underestimate what their health-care expenses will be in retirement. Fifty-two percent of those surveyed said they expected to spend less than $300 a month, yet retirees in the survey actually spent more than double that amount.

So how does one begin the planning process?

"Well, I think the first step is simply to acknowledge the fact that health needs need to be included as part of retirement planning," said Barbara Stucki, a project manager with the National Council on the Aging in Washington, D.C. "It is not just an income issue."

Many Americans are living longer, healthier lives than their grandparents did, and diseases that once meant certain death, including heart attack and stroke, are more likely to leave people with some sort of impairment. So having the resources, say, to make home modifications can greatly improve one's quality of life.

"For example," Stucki said, "if a person lives in a two-story house, they may need to put a bathroom on the first floor."

People also should plan for the routine health costs they'll encounter every month, including premiums for supplemental insurance, often called "medigap." The most popular plans cost an average of $155 a month, according to Anne Werner Richardson, a consultant on health and aging issues in Washington, D.C.

If you enroll in Medicare Part B, as most Medicare beneficiaries do, your monthly premium ($88.50 in 2006) will be deducted from your Social Security check. Plus, there's a $124 annual deductible. "So that totals $1,186 a year just for Part B," Richardson noted.

Prescription drugs are another routine expense. If you enroll in Medicare Part D, you may have to pay a monthly premium, an annual deductible and some portion of the cost of your drugs. Your actual cost will depend on the drugs you take and the coverage you have.

To offset catastrophic expenses, such as an extended nursing home stay, Baker strongly advises clients to buy long-term care insurance. A 2005 survey by the MetLife Mature Market Institute showed that a private room in a nursing home costs $203 a day, on average. That's $74,095 for just one year.

"Long-term care's much like your homeowners' insurance," she said. "It's just an insurance you hope you will never need, but it would be devastating if you didn't have" it.

If you think Medicaid will pick up the tab for nursing home care if you get in a financial bind, think again. The rules for qualifying for that federal-state program just got a lot tougher. As of February 2006, anyone who has more than $500,000 in home equity, for example, no longer can qualify for Medicaid. That means people who are house-rich but cash-poor who might have qualified for assistance in the past are no longer eligible, Stucki cautioned.

"People do need to think very carefully about how to manage their money and what kind of quality of life and choices that they want," she said.

More information

The U.S. Social Security Administration has online tools to help you plan your retirement.

SOURCES: Tracey A. Baker, CFP, vice president, Cooper, Jones & McLeland Ltd., Fairfax, Va.; Barbara Stucki, Ph.D., project manager, Use Your Home to Stay at Home initiative, National Council on the Aging, Washington, D.C.; Anne Werner Richardson, consultant, health and aging issues, Washington, D.C.; Oct. 20, 2005, press release, Financial Planning Association; MetLife Mature Market Institute, Westport, Conn., The MetLife Market Survey of Nursing Home and Home Care Costs, September 2005

Last Updated: Sept. 21, 2006

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