Association of
Ameritech/SBC Retirees
Item Of Interest
Posted 5/16/04
Retiree Health Costs Are
Far Higher Than Expected
By JANE J. KIM
DOW JONES NEWSWIRES
Spending on health care represents one of the largest expenses
in retirement. Yet people drastically
underestimate how much they need to save because
they are counting on Medicare or their employers to pay their bills.
In fact, actual costs are usually five times as high -- yes,
five times -- as what individuals tend to
estimate, according to the Employee Benefits Research Institute, a
nonprofit
research group in Washington.
According to the EBRI, individuals will need to
have saved anywhere from $80,000 to $700,000 to pay for their health-care
expenses in retirement, even with the new Medicare drug benefit, said Paul
Fronstin, director of
EBRI's health research and education program.
As daunting as those figures appear, there are steps that can
be taken to reduce future costs and get a handle
on potential expenses. But the first step is facing the reality.
Medicare typically covers about half of the average person's
medical expenses, and companies have been slowly
chipping away at the retiree benefits of their former employees. A study by
Watson Wyatt Worldwide, a benefits consulting
firm in Washington, estimated that the level of employer financial support
will drop to
less than 10% of total retiree medical expenses by 2031, under plan
provisions
already adopted by many employers.
Of course, a variety of factors, ranging from your health
and lifestyle to changes in the regulatory
environment will affect how much you will pay for health care.
The Big Gamble
In saving for retirement, the big gamble isn't that you'll die,
but that you'll live. Start by estimating your
life span. There are life-expectancy calculators on the Internet that take
into account factors such as your nutrition,
family history, health and lifestyle habits and environmental
circumstances. One such calculator, the Living to 100
Healthspan Calculator (www.livingto100.com),
was developed by Thomas Perls, an expert on aging at Boston University
School of Medicine and director of the New England Centenarian Study.
The rate of health-care cost increases will also affect your expenses.
Although health-care costs have been increasing at 14%
a year in recent years, forecasts say that costs probably will
moderate to 10% over the long term, Mr. Fronstin
says.
Next, double-check if your employer or your spouse's employer
offers retiree benefits, and what is involved if
it does; plans are changing rapidly. In 2003, just 38% of large firms --
those with 200 or more workers -- offered retiree health coverage, down from
66% in 1988, according a survey released in September by the Kaiser Family
Foundation and Health Research and Educational Trust.
Even if your employer offers retiree benefits now, you could
easily be shouldering most of the costs by the
time you retire. According to a survey from Mercer Human Resource
Consulting, average retiree medical plan costs in 2003 rose 14.3% for
pre-Medicare-eligible retirees and 11.2% for Medicare-eligible retirees.
Faced with the recent leap in costs, nearly four-fifths of sponsors reduced
retiree benefits in 2003, and nearly two-fifths
say retirees now pay the full cost of coverage in their plans.
Without health benefits through a former employer,
retirees can purchase some kind of policy to supplement Medicare coverage.
But even with a good supplemental policy, individuals without
an employer-sponsored plan who retire at 65 and
live to 80 will need to have saved about $80,000 to cover medical expenses,
EBRI calculates.
Those estimates are based on the assumption that health-care cost increases
moderate to 7% a year, Mr. Fronstin says.
Should costs continue to increase at the current rate of 14% and the retiree
lives to be 100, medical costs would reach an eye-popping $700,000. Sliced other ways: given a 10% annual increase in costs,
you would have to save 376,000 if you lived until 100, $90,000 if you lived
until 80 and $206,000 if you lived until 90 years old.
Nursing-Home Care
Those expenses can climb even higher if you need to pay for nursing-home
care, home-health care or any assisted-living expenses. A year in a nursing
home typically costs $50,000 or more, according to a 2002 General Accounting
Office report. A recent MetLife survey found that long-term care costs
average $181 a day, with the average stay running about 2.5 to three years.
For Peggy Dwyier, an 84-year-old Woodstock, Va.,
resident, her decision to buy a long-term-care insurance policy for herself
and her husband, Guy, in 1987 helped reduce that
liability. Mrs. Dwyier
decided to buy the policy a few years after her husband was hospitalized for back surgery. "You wake up to the fact that you might not
always be healthy when something like that
happens," she says. Now, the policy, which she bought through AARP, has
been paying for her husband's stay in an assisted-living facility since
2002, after he was diagnosed with Alzheimer's disease in 2000. The
policy's coverage runs out in 2005, after which
she'll have to find a way to pay the monthly $1,850
expenses herself.
Also, take advantage of any tax-favored savings opportunities. The Medicare
legislation that enacted the new prescription-drug benefit also created
health savings accounts, or HSAs. Targeted at those with high-deductible
health plans, HSAs, offered through employers, let you put aside income
before taxes up to the amount of the deductible and withdraw the funds
tax-free as long as the money is used for qualified health-care expenses.
"The expectation is that many -- maybe even most -- large employers will
introduce programs along those lines," says Joe Martingale, national leader
for health-care strategy at Watson Wyatt.