Face the Music of Trying Times to Come

Many financial planners caution thatretirees and future retirees need to planfor higher out-of-pocket medical costsduring retirement than they realize. Theproblem, they say, is twofold.

First, out-of-pocket medical expenses are higherthan most retirees anticipate. According to the EmployeeBenefits Research Institute (EBRI), actual medicalexpenses are 5 times greater than projected by thoseapproaching retirement. Medicare doesn't pay as muchas people think and employer-subsidized health carecoverage received during one's working years shieldsmost workers from the real cost of health care today.

Second, many large employers who have traditionallyprovided health care coverage for theirretirees have capped what they are willing to pay andhave raised retirees' share of premium and deductiblecosts. What's especially worrisome for retirees is theincreasing number of employers dropping retireehealth insurance programs.

Less Isn't More

Currently, one of three retirees aged 65 and olderrely on employer-sponsored plans to supplementMedicare, and 6 of 10 retirees aged 55 to 64 usuallyrely on employer plans as their primary coverage,according to a study released in early 2004 by theKaiser Family Foundation and Hewitt Associates. Butthat percentage is rapidly shrinking.

Depressing trend

In fact, 10% of employers said they dropped plansfor future retirees—not current retirees—within theprevious year, while 20% said they are likely to dropcoverage in the next 3 years. A separate Kaiser studyfound that 38% of employers with 200 or more workersoffer retiree health plans. : In1988, that figure was 66%.

Retirees age 65 and older may be especiallyhard hit by this trend. In April 2004,the US Equal Employment OpportunityCommission issued guidelines allowingemployers to dramatically scale back ordrop retirees from their health careplans once they turn age 65 andbecome eligible for Medicare. Beforethe Commission issued these guidelines,employers with retiree healthcare plans couldn't discriminatebased on age.

Address the Problem

What will be the impact onyour pocketbook and yourretirement plans? Depending onsuch factors as how long you live, the quality ofyour health, whether you have supplemental insurance,and the rate at which health insurance premiumsclimb, EBRI estimates that retirees will need anywherefrom $80,000 to $700,000 to pay for theirhealth care.

A study by Fidelity Investments found similaralarming figures. For example, a couple retiring at age65 can expect to pay $175,000 over the next 20 years,not including any bills for long-term care. What canyou do about this? For current retirees, the optionsare limited. Workers saving for retirement or nearingretirement have the following options:

• Assess your future need for health care. While wecan't really predict our future need for health care, weoften can make a reasonable guess.What's been your health history? Doyou smoke or are you overweight?What's your family's health history?
• Stay fit. Staying as healthy as possiblehas never looked so financiallysmart for retirees.
• Shop for health insurance. Study youroptions thoroughly before retiring. Beyondany plan your employer may offer, what'savailable on an individual basis?
• Retire later. Financial planners are seeingmore clients delay planned retirement whenconfronted by the high cost of funding their ownhealth care.
• See what retiree health benefits your employeroffers. Your current employer may provide aplan—at least to those under age 65. But if youchange employers, the new one might not. Ofcourse, there is no guarantee the employer won'tdrop this coverage.
• Consider long-term care insurance. Standardinsurance policies and Medicare generally don't coverlong-term care. Many advisors recommend buyingcoverage in your late 50s or early 60s, when it's stillaffordable and your health is more likely to be good.

Of course, you can always decide to save more foryour retirement. This choice isn't fun, but retirementexperts and surveys warn that workers aren't savinganywhere near enough for a standard retirement, letalone one that factors in high medical expenses.

This article has been produced by the Financial Planning Association(www.fpanet.org), which is the membership organization for thefinancial planning community.