Have you Budgeted $250,000 for Health Care in Retirement?

Last Updated Mar 23, 2010 12:15 PM EDT

Less than a year after declaring Chapter 11 bankruptcy, auto parts supplier Visteon Corp. found a neat way to swing back to profitability in 2009: wriggle free of its obligation to pay retiree health care benefits.
In announcing its improved fiscal '09 results the firm acknowledged backing out of its agreement to cover retiree health care costs was great for its bottom line: "Factors contributing to this improvement included a $133 million gain related to the termination of certain company-paid medical, prescription drug and life insurance coverage benefits."

The bankruptcy judge said it was indeed kosher.

That's just the latest data point making it clear that Baby Boomers need to anticipate the looming danger ahead: you are going to be on the hook for some mighty expensive medical costs in retirement. To be sure, Visteon retirees were already part of a dying benefit breed: according to the Employee Benefits Research Institute, just 21 percent of private-sector employees are eligible for retirement health benefits, down from 40 percent in 1993. Yet according to a new survey from Towers Watson, just 37 percent of works say they are comfortable with the idea of managing their health care needs in retirement.

It's time to get comfortable.

Plan on $250,000 in out-of-pocket health care expenses during retirement. Yes, $250,000. Probably more. Medicare does not cover a bunch of retiree medical expenses. And it wouldn't exactly be surprising to see current benefit levels reduced for future retirees given our budget issues. Even without pondering any future benefit reductions, Fidelity ran some numbers and said that last year a 65-year old couple would need $240,000 on average to cover their retirement out-of-pocket health care costs beyond what Medicare picks up. Yes, I am guilty of rounding up to $250,000. I hereby guarantee that when they run the numbers for 2010 it will indeed be at least that high. Moreover, future costs are going to be a lot worse. According to a series of simulations run by the non-partisan Employee Benefits Research Institute, the out-of-pocket heath care costs for a 65-year old retiring couple in 2018 could easily be $600,000 to $1,000,000 depending on if they have any employer-provided benefits and what Medicare and Medigap coverage they opt for.

This isn't just a private-sector issue. Public employees (and the taxpayers on the hook to support their benefits) are likely to face a shakeup in their future benefits as well. For all the deserved consternation over how state pension plans are seriously underfunded, there's another $587 billion shortfall in what states have promised in health care benefits and what has actually been set aside to fund those future obligations.

What to do? Well, for starters, next time you swing by your favorite retirement planning calculator, re-run the numbers to make sure that you will have enough set aside to cover what is increasingly looking like some steep medical costs in retirement. And hit the gym or running trail. A healthier you can mean lower medical costs down the line.
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  • Carla Fried

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