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The news just doesn't get better for beating the cost of health care in retirement. The costs continue to rise faster than inflation and insurance continues to fall short for many. The challenge of paying for medical care results in new ways of thinking for savers.
While many retirees have relied on their past employer to help pay medical costs, a recent ruling by the Equal Employment Opportunity Commission put another dent in retirees' budgets. The federal commission now says employers can cut medical benefits for retirees 65 and over. Before the ruling, employers could coordinate their benefits with Medicare to fill in gaps. Now some retirees may be getting told their benefits are being dropped. The ruling will hurt not only retirees, but future retirees who now must find a way to pay for uncovered Medicare expenses when they retire. And that means workers today need to increase their retirement savings to pay those costs.
Retirees face the biggest health care expenses from Medicare Part B and Part D premiums, which cover doctor and prescription bills, and the co-payments not covered by a past employer or Medicare, according to the Center for Retirement Research at Boston University. Medicare out-of-pocket expenses average $3,800 a year for singles and $7,600 for couples, the center said. Other expenses not covered by Medicare include dental care, eyeglasses and hearing aids, which adds another $500-$1,000 a year to the average medical costs. Of course, those individuals with health problems face higher costs and those who are healthier pay less.
The Centers for Medicare and Medicaid Services estimates all these medical costs will grow at an annual rate of 5.9 percent for the next 20 years. Therefore, a single person 20 years from retirement can expect to pay almost $14,000 a year in Medicare and out-of-pocket expenses when they retire. And if that retirement lasts 25 years, that person would need about $200,000 at retirement just for those medical expenses.
Based on these projections and current savings trends, the Center for Retirement Research estimates 61 percent of households will not be able to keep their standard of living in retirement because of medical costs.
"The outlook for baby boomers and Generation Xers is somewhat bleak," the center's report said. "It is critical for today's workers to anticipate large health care expenditures in retirement and adjust their retirement and savings plans accordingly."
How can workers give themselves a chance? Maintaining a healthy lifestyle can avoid a lot of pain, both physically and fiscally, but because even healthy people can develop a disease, financial planning is just as important.
For savings plans, it means investing in accounts with higher returns. That rules out sticking your money in a bank. Savings earning 3 percent a year would require about $5,400 set aside each year to reach $200,000 in 20 years while a return of 6 percent a year would require about $2,800 set aside each year, both assuming nothing has been saved so far. Higher returns come in the form of a diversified portfolio of mostly domestic and international stocks, which have historically performed in the 8 percent to 10 percent return range in the long term.
One way a saver could track retirement health care savings goal is to earmark the savings in a separate investment account, such as an Individual Retirement Account, to ensure the investment mix is targeted to return in the 6 to 10 percent range each year. Families with high-deductible health insurance could use their Health Savings Account for this purpose but risk the money being needed before retirement for current medical bills.
HSAs work like an IRA, but more tax deductible money can be contributed and withdrawals before and after retirement are tax free only for health costs. Contributions cannot be made after age 65, which in this case is the target year for building it up to $200,000 or more to meet those projected retirement health costs.
