Retirement healthcare costs: are you ready?

Photo: Medicare.gov website

Even without the government’s proposed cuts in Medicare and Medicaid spending, baby boomers reaching 65 this year may need to reconsider retirement plans if they don’t already have enough money saved to cover future healthcare costs which are only expected to escalate.

 According to a study just published by the Employee Benefits Research Institute , a man retiring this year at age 65 will likely need between $68,000 to $378,000 in savings to cover insurance premiums and out-of-pocket expenses during retirement. The differences in dollar amounts are based on the statistical chances of an individual having enough money. In other words, it one wants to be 90% sure of having enough in savings, he would need the higher amount; for a 50% chance he would need at least the lower amount.

Because women live longer, they need even more money. A women retiring at age 65 in 2009 will need from $98,000 to $242,000 in savings to cover insurance premiums and out-of-pocket expenses in retirement for a 50/50 chance of having enough money, and $164,000 to $450,000 for a 90% chance, said the report’s author, Paul Fronstin, an EBRI researcher.

According to the report, many Americans will probably need even more money than the amounts cited because the analysis did not consider the savings required to cover long-term care expenses, nor did it take into account the fact that many individuals retire before becoming eligible for Medicare.

For those already 65 without enough savings set aside for health care and without health benefits sponsored or subsidized by an employer, there is little recourse aside from not retiring. For those 55 or under, there is time to plan. Experts recommend dramatically reducing your standard of living, saving aggressively, working longer, and of course, trying to remain as healthy as possible for as long as possible.

It’s not too early to become familiar with Medicare and what it covers; Medigap which is the supplemental insurance that typically complements Medicare; Medicare Part D, the prescription-drug plan; and long-term-care insurance.
Medigap insurance policies are sold by private insurance companies to fill the gaps in Medicare plan coverage. "Medigap policies help pay some of the health-care costs that the original Medicare plan doesn't cover," according to the government's site. "If you are in the original Medicare plan and have a Medigap policy, then Medicare and your Medigap policy will pay both their shares of covered health-care costs."

Learn more about the various types of Medigap policies at this site. In Miami-Dade, for example, there are currently 62 different Medigap plans and 54 Medicare Part D plans. Average total costs for a healthy 65 year old just for the Medigap plan can run from around $2000 in an AARP plan to over $5000 in an Aetna plan depending on benefits. The average monthly premium for Medicare Part D coverage is $28 in 2009, according to the Centers for Medicare and Medicaid Services. Meanwhile, the standard Medicare Part B monthly premium is at least $96.40 this year

Determining how much money an individual or couple needs in retirement to cover health care is a complicated process, Fronstin said. “It will depend on the age at which he or she retires; length of life after retirement; the availability of health-insurance coverage after retirement to supplement Medicare and the source of that coverage; health status and out-of-pocket expenses; the rate at which health-care costs will increase; and interest rates and other rates of return on investments," he wrote in his report. While it is possible to come up with a single number for individuals to use to set retirement savings goals, Fronstin said a single number based on averages will be wrong for the vast majority of the population. "It's hard to plan for uncertainty," he said. "But you can plan for the average."

Fronstin's advice? Ask yourself: Do you want to take chances or do you want some certainty? A 50/50 chance means it's no more than a coin toss whether you'll have enough money to pay for medical costs in retirement.

In the past, health-care costs have risen at twice the rate of general inflation, and health care typically represents 12% to 14% of expenditures for those aged 65 and older.

In the near future, public-policy changes may affect spending on health care which makes planning that much more difficult for those now at or near age 65. Nevertheless, it is important to develop a basic understanding of the current program.

For further information: Read the entire study

Medicare website

Calculating retirement needs