Is Your Retirement Plan Vulnerable to a Punishing Hit?

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[dropcap]I[/dropcap]f you’ve spent more than a few minutes following any of the deficit and debt debate that has been front and center in Washington this year, you’re no doubt well aware that the Medicare program is going to eat up massive chunks of federal revenue in the coming decades. There’s that not so small issue of record numbers of Americans hitting age 65 and thus qualifying for the program, combined with the expensive fact that health care costs tend to grow at twice the pace of general inflation.

But what’s not so widely understood is that even in its current incarnation Medicare doesn’t foot the entire bill of retiree medical costs. There’s the annual premiums beneficiaries must pay to the program itself, the cost of buying supplemental Medigap insurance that covers expenses that are not part of the Medicare coverage umbrella, and any out of pocket expenses for care above and beyond what is covered by Medicare and Medigap.

At the risk of setting off some heart palpitations, the reality is that you will likely spend north of six figures in retirement covering health care expenses that exceed what Medicare picks up.

The Six-Figure Threat to Your Financial Health

The non-partisan Employee Benefit Research Institute does an annual crunching of the numbers to estimate the out of pocket expenses of retiree health care. Here’s a quick quiz using EBRI data:

QUESTION: A 55-year-old couple in 2010 will become eligible for Medicare in 10 years. Let’s assume that at age 65 they will be healthy enough that their drug expenses from age 65 forward will be at the national median. We’re also going to assume that they are part of the 80 percent of private-sector workers who are not going to get a dime from any past employer to help with retiree health care costs. Final assumption: Our couple wants to have a very high probability (90 percent) that they will in fact be able to cover their out of pocket medical expenses in retirement.

So how much might that couple need to cover their medical expenses from age 65, including the basic premium for Medicare coverage as well as all the additional costs mentioned above?

  1. A. $153,000 (for both)
  2. B. $276,000
  3. C. $454,000.

Answer: C.

Yes, I am serious. And, um, that doesn’t even include the potential cost of needing long-term care at some juncture.

Save, save, save

If our couple wants to roll the dice a bit—and for my money this is an insane gamble-and settle on having a 50-50 chance of being able to cover their medical expenses they will need “just” $265,000.

Then again, if they end up with an illness that pushes their drug costs into the top 10 percent of the nation, and they want to have a high probability of affording all their health bills, well, the tab rises to $655,000.

The obvious take-away from all that is the importance of making sure you do your very best to save more today for retirement. You know the drill here: max out on the 401(k), take advantage of the IRA. And if your employer offers a Health Savings Account tied to a high deductible health insurance plan, that’s definitely worth a look-see.

A less obvious strategy that will pay off big time: Take good care of yourself, starting yesterday. Buckling down a bit on the good eating and good exercise routine today can help you arrive at 65, 75, 85 and beyond in the best possible health. Sure, there’s no guarding against plenty of illnesses. But we all know that the better care we take today, the better odds of being healthier, longer. The double payoff is not only a higher quality of life, but potentially lower out of pocket health care expenses in retirement.

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Carla Fried

Carla Fried is a freelance journalist who has covered just about every nook and cranny of personal finance for media including Money Magazine, The New York Times, and CBS MoneyWatch.com. Prior to launching her own reporting and writing business in 2002 she was a senior writer at Money and the managing editor of Quicken.com.

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