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Getting Personal: Saving for Health Care In Retirement

Contributed By: Dow Jones
Published: May 11, 2004

NEW YORK (Dow Jones)--Marsha Rosenbaum has discovered the secret to cutting her health-care bills in retirement: She exercises daily and keeps her mind active by working part-time and reading voraciously.

"I don't think of age," said the 76-year-old Chicago resident, who estimates that she spends between $30 and $40 a month on vitamins and a prescription for high blood pressure. She attributes her good health to family genes and feels fortunate that her health care expenses are low - especially when she knows of people who spend hundreds of dollars a month on prescription drugs.

For retirees like Rosenbaum, keeping fit is one of the ways she's reducing health-care costs. But for most, spending on health care represents one of the largest expenses in retirement. It's a problem made worse by people drastically underestimating how much they need to save because they are counting on Medicare or their employers to pay their bills. In fact, people's estimates of how much they expect to spend make up about 20% of the actual costs, according to the Employee Benefits Research Institute.

The reality is that Medicare typically covers about half of the average person's medical expenses, while companies have been slowly chipping away at retiree benefits. A Watson Wyatt Worldwide study estimated that the level of employer financial support will drop to less than 10% of total retiree medical expenses by 2031, under plan provisions already adopted by many employers.

Of course, a variety of factors, ranging from your health and lifestyle to changes in the regulatory environment will affect how much you'll pay for health care. According to one industry group, individuals will need to have saved anywhere from $80,000 to $700,000 to pay for their health care expenses in retirement - even with the new Medicare drug benefit, said Paul Fronstin, director of EBRI's health research and education program.

Yet as daunting as those figures appear, there are steps you can take to reduce future costs and get a handle on potential expenses.

Start by estimating your life span, since longevity will play a key role in determining your total expenses. Variables such as your gender, age, family medical history, and general lifestyle will affect how long you'll live, but you can also use an online personal life expectancy calculator, which uses more detailed information in determining age at death.

The rate of health-care cost increases will also affect your expenses. Although health-care costs have been increasing at 14% a year in recent years, it's more likely that costs will moderate to 10% over the long term, said EBRI's Fronstin.

Next, find out if your employer or your spouse's employer offers retiree benefits. In 2003, 38% of large firms - those with 200 or more workers - offered retiree health coverage, down from 66% in 1988, according a survey released in September by the Kaiser Family Foundation and Health Research and Educational Trust.

Even if you're lucky enough to work at a firm that offers retiree benefits, you'll probably be shouldering most of costs by the time you're ready to retire. A survey from Mercer Human Resource Consulting found that average
retiree medical plan costs rose sharply in 2003 by 14.3% for
pre-Medicare-eligible retirees and 11.2% for Medicare-eligible retirees. This prompted a wave of plan changes. Nearly four-fifths of sponsors reduced retiree benefits in 2003, and nearly two-fifths say retirees now pay the full cost of coverage in their plans. Many companies, for example, are requiring higher retiree contributions to premiums and cost-sharing obligations, tightening eligibility requirements and imposing caps on the amount the company will pay toward premiums.

Since most retirees probably won't have access to retiree health benefits through a former employer, their options will typically be limited to purchasing a Medigap policy to supplement Medicare coverage. In that case, assuming that individuals who receive no retiree health-care coverage from their employers buy the most comprehensive Medigap plan that doesn't cover drugs, they will need to have saved about $80,000 to cover medical expenses alone if they retire at 65 and live to 80 - assuming that health-care cost increases moderate to 7% a year, EBRI's Fronstin calculated. Should costs continue to increase at the current rate of 14% and you live to 100, you'll need to save an eye-popping $700,000. And given a 10% annual increase in costs, you'd have to save $376,000 if you lived until 100, $90,000 if you lived until 80 and $206,000 if you lived until 90 years old.

Those expenses can climb even higher if you need to pay for nursing-home care, home-health care or any assisted-living expenses. A year in a nursing home typically costs $50,000 or more, according to a 2002 General Accounting Office report. A recent MetLife survey found that long-term care costs average $181 a day, with the average stay running about 2.5 to 3 years.

For Peggy Dwyier, an 84-year-old Woodstock, Va., resident, her decision to buy a long-term care insurance policy for her and her husband, Guy, in 1987 helped reduce that liability. Dwyier decided to buy the policy a few years after her husband was hospitalized for back surgery.

"You wake up to the fact that you might not always be healthy when something like that happens," she said. "It seemed to me like a very good idea because we're all living longer than we used to."

Now, the policy, which she bought through AARP, has been paying for her husband's stay in an assisted-living facility since 2002, after he was diagnosed with Alzheimer's disease in 2000. The policy's coverage runs out in 2005, after which she'll have to find a way to pay the monthly $1,850 expenses herself.

Also, take advantage of any tax-favored savings opportunities. The Medicare legislation that enacted the new prescription drug benefit also created health savings accounts, or HSAs. Targeted at those with high-deductible health plans, HSAs let you put aside income before taxes up to the amount of the deductible and withdraw the funds tax-free as long as the money is used for qualified health care expenses.

"The expectation is that many - maybe even most - large employers will introduce programs along those lines," said Joe Martingale, national leader for health care strategy at Watson Wyatt.

HSAs, coupled with employer-paid health reimbursement accounts, will help the "employee to be a better educated consumer of health-care services," added Ed Pudlowski, senior manager at Ernst & Young.
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Jane J. Kim is one of four Getting Personal columnists who write about personal-finance issues ranging from new tax proposals to education-funding strategies to estate planning.