How to Avoid a Financial "Sick Bed" in Retirement

Financial Planning Association

Retirees and current workers need to plan to pay far more out of pocket for medical care during retirement than they realize, caution many financial planners.

The problem is twofold. First, out-of-pocket medical expenses are higher than most retirees anticipate. According to the Employee Benefits Research Institute, actual expenses are five times greater than projected by those approaching retirement. Medicare doesn't pay as much as people think, and employer-subsidized healthcare coverage received during one's working years shields most workers from the true cost of healthcare—all of which is compounded by the escalating need for medical care as one ages.

The second major factor is that many large employers who traditionally have provided healthcare coverage for their retirees have capped what they're willing to pay and have raised retirees' share of premium and deductible costs. But what's especially worrisome to retirees is the increasing number of employers dropping retiree health insurance programs.

Currently one in three retirees age 65 and older rely on employer-sponsored plans to supplement Medicare, and six in ten retirees age 55 to 64 usually rely on employer plans as their primary coverage, according to a study released in early 2004 by the Kaiser Family Foundation and Hewitt Associates. But that percentage is rapidly shrinking. Ten percent of employers said they dropped plans for future retirees (not current retirees) within the previous year, and 20 percent said they are likely to drop coverage in the next three years. A separate Kaiser study found that 38 percent of employers with 200 or more workers offer retiree health plans, versus 66 percent in 1988.

Retirees age 65 and older may be especially hard hit by this trend. In April 2004, the U.S. Equal Employment Opportunity Commission issued guidelines allowing employers to dramatically scale back or drop retirees from their health plans once they turn 65 and become eligible for Medicare, while retaining retirees younger than 65. Before, employers with retiree plans couldn't discriminate based on age.

What will be the impact on your pocketbook and your retirement plans, and what can you do about it? Depending on such factors as how long you live, the quality of your health, whether you have supplemental insurance, and the rate at which future health insurance premiums climb, EBRI estimates that retirees will need anywhere from $80,000 to $700,000 to pay for their healthcare.

A study by Fidelity Investments found similar alarming figures: A couple retiring at age 65 can expect to pay $175,000 over the next 20 years, not including any bills for long-term care.

What can you do about this? For current retirees, options are limited. Workers still saving for retirement or perhaps nearing retirement have more options, if they start planning now.

Assess your future need for healthcare. While most of us can't know exactly our future need for healthcare, we often can make a reasonable guess. What's been your health history? Do you smoke or are you overweight? How much do you currently use medical care? What's been the health history of your family members? Do you have a family history of longevity or short life expectancies?

Stay fit. Staying as healthy as possible has never looked so financially smart for retirees.

Shop for health insurance. Study your options thoroughly before retiring. Beyond any plan the employer may offer, what's available on an individual basis? Is your health good enough to qualify for it?

Retire later. Financial planners are seeing more clients delay planned retirement when confronted by the high cost of funding their own healthcare.

See what retiree health benefits your employer offers. Your current employer may provide a plan, at least to age 65. But if you change employers, the new one might not. And of course there is no guarantee any employer won't drop future coverage for all retirees.

Save more for retirement. This choice isn't fun, but retirement experts and surveys warn that workers aren't saving anywhere near enough just for a standard retirement—let alone one that factors in high medical expenses.

Consider long-term care insurance. Standard health insurance policies and Medicare generally do not cover long-term care. Many planners recommend buying coverage in your late fifties or early sixties when it's still affordable and your health is more likely to be good.

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June 2004—This column is produced by the Financial Planning Association, the membership organization for the financial planning community. If you use all or part of this column, please credit FPA and provide a link to FPA's Web site at www.FPAnet.org/Public.

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