Coping with rising retiree medical costs

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(MoneyWatch) A recent report from Fidelity Investments estimates that a 65-year-old couple retiring in 2012 would need about $240,000 in today's dollars to cover medical expenses throughout their retirement. This represents a 4 percent increase over the 2011 estimate of $230,000.

Since 2002, Fidelity's estimate has increased every year except in 2011 (when the one and only decrease was due to a one-time adjustment that reflected changes in Medicare). These changes reduced out-of-pocket expenses for prescription drugs. Yet even this small improvement against the broader backdrop of rising health care expenses is in jeopardy if the Affordable Care Act is overturned by the Supreme Court. That would likely cause retiree health costs to rise even more. Fidelity's estimate also doesn't include vision, dental, or long-term care costs, painting a potentially even darker picture for millions of Americans. 

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What can you do?

For one thing, don't give up! You can take steps now to address the threat of high health care costs in retirement.

First, realize that you don't need to have all this money in your 401(k) or savings account today, dedicated just to cover retiree medical costs. You'll pay for medical premiums and expenses throughout your life; for example, most retirees have Medicare's premiums deducted from their monthly Social Security income. If you're lucky enough to have a pension from work, you can also use that monthly income to pay for medical premiums and expenses.

However, using Social Security alone to fund Medicare premiums and medical expenses represents a challenge. Fidelity estimates that for the average couple, medical expenses would consume about 35 percent of their Social Security income in 2012 -- and that percentage would increase to 61 percent in about 15 years.

As a result, you'll need other sources of retirement income to pay for retiree medical costs. That means boosting your savings in your 401(k) or health savings accounts (HSA), if eligible. Many employers have implemented high-deductible health plans that combine HSAs with robust wellness programs. Often, these programs will contribute to your HSA if you participate in the wellness activities. 

Be well

Not participating in such a wellness program is actually worse than not taking full advantage of your company's 401(k) match. Not only would you be leaving money on the table, you'd be passing up the opportunity to reduce future health care costs by improving your health. That's a move only Homer Simpson would make!

How much can you save by taking care of your health? I've previously estimated that only about 30 percent, or $72,000, of the $240,000 projected by Fidelity would be needed to pay for Medicare premiums. The remainder, about $168,000, would pay for deductibles and co-payments -- in other words, costs you're charged when you get sick. While it's unrealistic to think you can eliminate this amount entirely, it represents your total potential savings if you get serious about taking care of your health by maintaining a healthy weight and getting sufficient exercise.

Another win-win is to consider working during the early part of your retirement years. Not only will you earn additional money, but you might be eligible for medical coverage as an active employee, which will reduce your out-of-pocket expenses for medical care. Many employers provide medical insurance to part-time workers and subsidize a portion of the cost, so you won't have to pay the full freight for insurance coverage. And working can keep you socially active and engaged with life in your retirement years, which might improve your health, as well!

While there's no need to despair over this news, consider it serious motivation to take steps that will help you live long and live well in retirement.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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