When planning for retirement do not overlook rising healthcare costs

March 27, 2007

Jilian Mincer

JILIAN MINCER

Most Americans aren't thinking about retiree healthcare costs -- but they should.

On Tuesday, Fidelity Investments released its annual retiree healthcare costs estimate. Fidelity predicted that a couple retiring in 2007 without retiree healthcare benefits would need $215,000 for medical costs during retirement. That doesn't include the cost of over-the-counter medications, most dental services, and long-term care.

That is a 7.5 percent increase over the 2006 estimate of $200,000, and a 34 percent increase over the original 2002 estimate.

The nonpartisan Employee Benefit Research Institute last year estimated costs would be even higher. A couple, it said, should expect to spend $295,000 for healthcare premiums and out-of-pocket expenses during retirement.

Despite these regular warnings, most Americans aren't thinking about retiree healthcare costs, let alone saving for them. The reason: They typically don't realize that healthcare premiums are their responsibility. Workers assume that employers who provide it during their working years will pay the premiums during retirement.

A 2006 study by Hewitt Associates and the Kaiser Family Foundation found that, while many large companies still offer retiree healthcare, the benefit -- like traditional pensions -- is quickly disappearing.

And employees are being forced to save for the expense. The study found that, between 1988 and 2006, the share of large employers offering retiree health benefits declined to 35 percent from 66 percent. Employers also have shifted more of the costs to retirees through higher premium contributions and higher cost-sharing requirements.

"Even if you have employee coverage now, you wonder if it'll be there in the future," said Allen Steinberg, a principal at Hewitt. "I think, by and large, it's simply too difficult to deal with."

Dallas Salisbury, president of EBRI in Washington, D.C., said "The public overwhelmingly thinks that Medicare covers all retiree medical expenses." About 80 percent of people, he said, think it covers long-term care, which it doesn't.

Medicare, according to EBRI, covers only about half of retiree health expense.

Consumers should expect to spend about $125 a month for individual coverage and $250 for a couple, said Cara Jareb, director of retiree medical consulting for Watson Wyatt.

The Fidelity study predicted that 67 percent of the $215,000 would be spent on Medicare Part B & D premiums and other out-of-pocket copays. The remaining 33 percent would be for out-of-pocket expenses for prescriptions.

Those higher expenses for retiree medical-care costs also have made early retirement more difficult. Most employees can't afford to retire before 65 when they are eligible for Medicare, according to Hewitt.

"Sixty-seven is the new 65 and 65 is the new 62," said Steinberg. "Retiring at 62 is now more of a luxury, and 55 is not realistic."

The Fidelity report recommended that individuals take into account anticipated income sources, lifestyle, and health status when planning for retirement.

In additional to saving in traditional 401(k) and IRA accounts, individuals should consider using Health Savings Accounts to save additional funds for healthcare expenses.

While not yet available to most Americans, HSAs enable consumers to invest pretax dollars in high-earning years and withdraw that money in retirement for out-of-pocket medical costs.

But the plans have some drawbacks. For starters, they are available only with high-deductible health plans, and the maximum contribution limit in 2007 is $2,850 for an individual and $5,650 for a family.

While employers like the plans because they save healthcare costs, many consumers don't and, when given a choice, most still avoid them. The other drawback is that most people with HSAs aren't saving the money for retirement. They are spending it on current medical costs.

Jilian Mincer is a Dow Jones columnist. She can be reached at jilian.mincer@dowjones.com

� Copyright 2007 Globe Newspaper Company.