Budgeting for healthcare in retirement

"Today's workers must understand that the cost of healthcare is expected to continue rising significantly in future years."

Many Americans assume that Medicare, the government-backed health-insurance program, will cover the majority of their heathcare costs after they stop working.

But according to a new report from Fidelity, a 65-year-old couple that plans to retire in 2012 needs an additional $240,000 to cover out-of-pocket costs not covered by Medicare. This amount increased 4 percent from last year's estimate of $230,000, but it's still below the 2010 estimate of $250,000. Annual increases in retiree healthcare costs have averaged 6 percent since Fidelity's first calculation in 2002.

"Today's workers must understand that the cost of healthcare is expected to continue rising significantly in future years," says Brad Kimler, executive vice president of Fidelity's benefits consulting business. "Medical inflation is outpacing salary increases and cost-of-living adjustments for many people. Until that situation changes, it is critical that individuals include healthcare costs in their retirement-savings strategies today so they can be prepared to pay their medical bills throughout retirement."

Kimler adds that Social Security payments alone will not be able to cover healthcare expenses in retirement, and that planning for these expenses should begin long before retirement. "Retirees relying entirely on Social Security to fund their healthcare costs will be faced with difficult challenges in the future," Kimler says. "Today's workers should plan to supplement their retirement income to cover their medical expenses."

Working longer to deflect costs. Carolyn McClanahan, director of financial planning at Life Planning Partners, says the best way to counter rising healthcare costs is to work longer.

"The problem that we get into with healthcare during retirement depends largely on what age people retire at," she says. "If you're retiring early, healthcare is a huge unknown. We don't know what it's going to look like or how expensive it's going to be."

[See How Much Should You Save for a Comfortable Retirement?]

Currently in the United States, the early retirement age is 62, while the full retirement age is 67. According to recent data, many Americans are working well past that age. A recent New York Times report found that 18 percent of Americans over 65 are currently part of the workforce, up from 13 percent 10 years ago.

This increase is an outcome of the poor economy. But one of the positives is that workers are able to stay on employer health insurance longer while continuing to save for retirement.

McClanahan says working longer keeps people on an employer's plan during the so-called "go-go" phase of retirement, or the active years early in retirement. This period is followed by the "slow-go" period, in which activity slows, followed by the "no-go" phase, or the years near the end of one's life.

"During the 'no-go' phase of retirement, healthcare costs can really add up," she says.

Costs also come from supplemental plans needed to compliment basic Medicare. Insurance companies sell these plans, which are approved by the federal government, to retirees to extend coverage to doctor's visits, prescription drugs, and other costs unrelated to basic hospital visits.

Entering retirement healthy, both in body and finances. Wendy Richards is a doctor and national medical director for Aetna's commercial businesses, and the spokesperson for the company's Plan for Your Health campaign. She says one key in keeping healthcare costs down is to enter retirement healthy.

"It helps to implement health and wellness strategies well before retirement," she says. "Try to keep yourself as healthy as you can, and if you do have chronic conditions, manage them with your doctor." McClanahan adds that older workers are susceptible to many of the conditions that drive healthcare costs up. "Obesity, diabetes, and heart disease add to the bottom line because of co-pays," she says, referring to the payment patients must make independently of the insurance payment.

Both Richards and McClanahan stress that financial fitness is as important as physical fitness. The large sum required for proper healthcare demands that healthcare be factored into everyday living expenses and that investors start saving earlier in their careers. Richards says there are options outside of the traditional 401(k) that allow for health-specific savings.

"When we work with our plan sponsors, we talk to them about health savings accounts, a relatively new concept," Richards says, referring to accounts that allow workers to save pre-tax income to pay for health-related costs. "If Fidelity is right and it's going to take $240,000 today to manage healthcare expenses outside of the government, now's the time to start saving."



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