By Ellen Hoffman
Steven "Shags" Shagrin, 47, a financial planner in Youngstown, Ohio, has given plenty of thought to financing retirement -- for his clients as well as himself. As familiar as he is with what goes into a comfortable retirement, even he was shocked by recent estimates for medical-insurance costs. A new Web calculator estimated that if he retires in 20 years and lives to be 100, his medical insurance bill would be $1.1 million. The fact that the cost would be less than half that if he lives to only 85 offers little solace.
Even though the warning signs of spiraling health-care costs for future retirees have been mounting for several years, it's not surprising that even a professional like Shagrin would be startled by the figures. Annual surveys by Mercer Human Resource Consulting have found that the number of companies with 500 or more employees offering retiree health benefits has declined from 46% in 1993 to 29% in 2001. Mercer has also found that more of the companies (39% in 2000, up from 31% in 1997) that offer the benefits are asking employees to shoulder the entire cost of the premium and implementing other cost-cutting measures such as capping total benefits.
A recent Kaiser/Hewitt Retiree Health Survey suggests that these trends will continue. The survey reported in 2002 that 82% of large employers say they're "very likely" (64%) or "somewhat likely" (18%) to increase the amount retirees must contribute to paying the premiums. Also, 54% said they were "very likely," and 22% said they were "somewhat likely" to also require employees to pay more of the actual health-care costs. The full results are available at the Kaiser Family Foundation Web site.
These studies and several others that document the growing scarcity and higher costs of retiree health benefits are summarized in Retiree Health Benefits: Savings Needed to Fund Health Care in Retirement, a recent analysis by Paul Fronstin and Dallas Salisbury of Washington research group Employee Benefits Research Institute (EBRI). You can read the full report on the EBRI Web site.
Medicare covers only 56% of health-care costs for people who are enrolled, according to Tricia Neuman, vice-president of the Henry J. Kaiser Family Foundation, a nonprofit research organization based in Menlo Park, Calif. And Medicare has other drawbacks, too. With rare exceptions, you can't get coverage until age 65, and the coverage is neither free nor comprehensive.
Medicare's Part A, which covers in-hospital costs, has a deductible of $830 in 2003. Current beneficiaries also must pay $58.70 a month for Part B, the insurance for outpatient costs such as doctor visits. But these rates -- and various other deductibles and co-payments required by Medicare -- tend to increase every year. And people who aren't in the hospital get no prescription-drug coverage. According to a Commonwealth Fund study, the average out-of-pocket medical expense for someone on Medicare in 2000 was $3,142, a figure that the Fund estimates could grow to more than $5,200 by 2025.
Sobering as these trends are, your medical expenses in retirement could be even higher if the cost trends exceed the Centers for Medicare & Medicaid Service's projection. Its estimates are a conservative annual increase in the cost of health spending of 6.4% per person from now to 2010.
So what does this mean to you? The EBRI paper spins several scenarios that estimate the money needed to cover costs depending on retirement age, lifespan, and estimated increases in insurance premiums. If you're into numbers and probabilities, you can look these up in Figure 9 of the report at the EBRI Web site.
Even better, you can follow Chagrin's example and use the Retiree Health Calculator at the "Choose to Save" Web site. It's sponsored by EBRI and a public-private group that promotes saving for retirement, the American Savings Education Council. By Ellen Hoffman
PLAN FOR THE WORST.
I experimented with the calculator, posing as a 50-year-old who plans to retire at 65, whose savings are growing at 4% annually, and whose life expectancy is 85 years. I learned that if insurance premiums increase an average of 4% annually, I'd need $349,300 in savings to cover medical costs in retirement -- and that doesn't include long-term care.
At 6% increases, the cost tops $500,000, and with a 10% annual increase in premiums, the figure was a mind-boggling $1.5 million. EBRI's Fronstin notes that the figure also doesn't include any out-of-pocket costs, such as prescriptions. And, as Shagrin says, "that's just for health care," and doesn't include any other retirement-living costs.
It's always good to follow the usual advice of saving as much as you can for retirement, but you can also do things now to protect yourself against this uncertain medical future. One is to acknowledge the scope of the problem. "When you're doing financial projections for retirement," Shagrin suggests, "plan for the worst case."
Once you've used the calculator, you'll have an idea of what that might be. If you use more comprehensive calculators, such as those at www.fidelity.com or www.asec.org, make sure your estimates of health-care expenses are realistic, based on the information coming out of these recent studies.
Next, get a clear picture of what benefits, if any, you and your spouse will get from your employment. Joel Framson, a financial planner in Los Angeles, had a 48-year-old client who had health problems and wanted to retire early. After looking into his benefit plan, the client, a policeman, realized that if he retired immediately, he could incur additional health-insurance costs of $8,000 to $10,000 per year until he was eligible for his health benefits in retirement. This information was a major factor in his decision to stay on the job for several more years.
Post-retirement self-employment -- even part-time work -- could also help reduce your costs. In 2003, for the first time, people who are self-employed can deduct 100% of their health-insurance premiums. Even if you don't work for yourself now, if you plan on doing consulting or other work after you retire, you could generate some savings by starting a small business.
While a tax deduction doesn't compensate completely for having to spend the money, "it pays to have Uncle Sam participating as a partner," Framson points out. "If you're in the 30% to 35% tax bracket and your health insurance is running $6,000 to $8,000 a year, this will shave a couple of thousand dollars off the bottom-line cost." To learn how to make your business qualify for such tax breaks, you can read Is It a Business or a Hobby on the IRS Web site.
Shagrin adds two other strategy suggestions. One is to look into buying long-term-care insurance at a relatively young age -- in your 40s or 50s -- because premiums increase as you get older (see BW Online, 9/21/00, "The Hidden Costs of Long-Term Care Policies"). This is important because long-term care isn't covered by Medicare, so unless you dispose of your assets and go on Medicaid, your costs will have to be paid some other way. You won't get much help from Medicare, for example, for home health care.
Shagrin also says to "watch your diet and stay as healthy as you can, because so many health conditions are a result of lifestyle choices." Before you dismiss this last bit of advice, experiment with some of the life-expectancy calculators posted on the Web (here's a list from Choose to Save). Try comparing the results for a svelte, maximum two-drinks-a-day, nonsmoking jogger with those for an overweight couch potato who refuses to buckle his seatbelt and has a penchant for multiple martinis. Then rev up your retirement budget plan, and make your choice.
Hoffman writes Your Retirement only for BusinessWeek Online. She's the author of The Retirement Catch-Up Guide and Bankroll Your Future Retirement With Help from Uncle Sam. You can contact her through her Web site, www.retirementcatchup.com
Edited by Patricia O'Connell