Planning to Cover Future Health Care Costs

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Although most retirees are eligible for Medicare, they must still shoulder the much of cost of their health care expenses. According to the Employee Benefit Research Institute, in 2008 the median amount a retired couple will need to spend on health insurance premiums (Medicare Part B and supplemental medical insurance that is not subsidized by a former employer) and on out-of-pocket health expenses during retirement is $246,000. A couple retiring at 65 in 2018 would need $412,000.* These estimates do not include the cost of long-term care!

As hefty as that sounds, with shrinking Medicare benefits, decreasing employer health insurance for retirees and rising health expenses on the horizon, younger educators should plan to cover even more of their health care costs. Fortunately, careful planning and diligent savings can provide the funds you will need in retirement. In addition, you should check your collective bargaining agreement to identify what type of retiree medical benefits are provided by your school district and what the eligibility requirements may be.

Crunch the Numbers

Before you can put together a savings strategy, you should estimate how much you need to accumulate by the time you retire. Generally, you want to consider these issues when calculating a total:

  • The cost of basic living expenses
  • Expenses for activities, hobbies and other pursuits
  • Insurance premiums
  • Debt payments

You can use the Projected Retirement Expense Calculator to help identify how much you will need.

In addition, you need to carefully estimate your health care expenses. Although your health can change dramatically due to sudden illness or trauma, you can make some educated guesses about your future health care needs.

Review your current health status. Do you have any chronic conditions, and if so, what is the long-term prognosis? How much do you currently spend on health care, including prescription and over-the-counter medications?

Also consider issues that could lead to potential health problems. What is your family’s health history: Did your parents or grandparents live long healthy lives or develop major medical issues as they aged? Does your current lifestyle promote disease prevention or put you at risk for serious illness? For example, if you smoke, you may be at risk for heart disease, emphysema and lung cancer. However, if you don’t smoke, exercise regularly and eat a healthy diet, you may be at reduced risk for these illnesses.

As Americans live longer, nursing-home care is becoming a reality for many retirees. You may want to factor into your estimate the cost of this care and/or long-term care insurance premiums.

Adjust Your Strategy

Once you have your ballpark figure, develop an investment strategy to help reach your goal based on your timeline and risk tolerance. Your 403(b) or 457 plan is an excellent vehicle to help boost your savings potential:

  • Your traditional 403(b) or 457 plan contributions are made pre-tax, so you can afford to set aside more than with after-tax dollars.
  • Your earnings grow tax-deferred, thus your money may compound faster than if you had to pay taxes on the earnings each year.**
  • Your plan offers a variety of investment choices to help you develop a diversified portfolio.

* Source: "Savings Needed to Fund Health Insurance and Health Care Expenses in Retirement: Findings from a Simulation Model, Employee Benefit Research Institute, Issue Brief, May 2008.

** Withdrawals will be taxed at ordinary income tax rates. Distributions made before age 59 1/2 (age 55 upon separation from service) may incur a 10% tax penalty as well (does not apply to 457 plans).


How Much Will You Need?

The figures below show how much an individual age 55 in 2007 would need to have saved by 2017 to cover employer-based health insurance premiums, Medicare Part B and out-of-pocket health costs for his or her retirement. The figures assume a 4% after-tax rate of return on investments and a 7% annual increase in costs. To determine the amount of savings needed for a couple, double the estimates if you expect to live to the same age or estimate a life expectancy of 82 for men and 85 for women.

Life expectancy Health care costs

Source: Employee Benefit Research Institute, Issue Brief No. 295, July 2006.