chicagotribune.com
8 tips on paying for health care in retirement
Emily Brandon
Premium Health News Service
April 22, 2009
It's difficult to predict what your health care expenses will be in retirement. Jack Dickinson, 65, thought he was one of the lucky ones. His 34 years as a General Motors sales and marketing manager came with two gold-plated benefits: a pension and lifetime medical coverage.
And Dickinson was lucky indeed--until GM scrapped retiree health care coverage this year for about 100,000 white-collar retirees, him included.
The beleaguered auto giant did raise monthly pension payments by $300 to help retirees buy their own coverage. But "it does not replace, by any means, the excellent coverage that GM gave us," says Dickinson, a retiree in Hoover, Ala. "If you go on the open market and try to replace everything, it is not available."
Here are some tips on how to cope with health care expenses in retirement:
1. Don't count on employer benefits. Most current employees will never face Dickinson's quandary because they won't be eligible for retiree health insurance through their former employer in the first place. Less than a third of firms with 200 or more workers offered retiree health benefits in 2008, down from the 66 percent that did so in 1988, according to a Kaiser Family Foundation survey.
Among small companies, retiree coverage is much more rare: only 4 percent offer it. But even if your employer offers retiree health insurance, don't count on receiving benefits. Retiree health insurance agreements often include clauses that give the company the right to modify or terminate the program at any time. If benefits continue, retirees are likely to face higher premiums, increased out-of-pocket expenses, and tougher eligibility requirements. And there's nothing that safeguards retiree health insurance benefits like the federal Pension Benefit Guaranty Corp., which, in private-sector pension plans, pays workers if a plan or a company fails.
2. Try to make it to Medicare. How do you protect yourself from crippling medical bills in the face of nonexistent or disappearing health insurance? The answer might seem to be seeking out an employer that provides health care benefits until age 65, when you qualify for Medicare. Sounds simple enough, if you can manage to stay employed with company benefits in this tough economy. If you're laid off, find out if you're eligible for a spouse's health plan and COBRA continuation coverage through your former company. That coverage lasts up to 18 months. The American Recovery and Reinvestment Act, passed in February, promises employees who were laid off between Sept. 1, 2008, and Dec. 31, 2009, a 65 percent subsidy toward COBRA premiums for up to nine months.
Workers who retire before they qualify for Medicare at age 65 often face the steepest health care costs. The average cost of premiums for employer-provided coverage for retirees under 65 is $13,308 a year, according to a Towers Perrin survey. The typical early retiree is expected to pick up $6,960 of that tab. But retirees who don't have employer-subsidized insurance or coverage through a spouse will pay even more. Costs vary widely for individuals. Those who have bad health habits or chronic illnesses generally pay more--if they can even get coverage.
3. Plan for Medicare costs. Retirees with Medicare face significant out-of-pocket costs. Major health care expenses include premiums for Medicare Part B (physician and outpatient hospital services) and Part D (prescription drug-related expenses), co-payments, coinsurance, deductibles, and excluded benefits like dental care, eyeglasses, and hearing aids.
A couple retiring in 2010 would need nearly $206,000 in 2007 dollars to buy an annuity sufficient enough to cover out-of-pocket health care costs in retirement, according to the Center for Retirement Research at Boston College. A couple retiring in 2040 would need more than $491,000. Other studies come up with similarly large numbers.
Fidelity Investments says a 65-year-old couple retiring in 2008 will need approximately $225,000 to cover medical costs in retirement. That doesn't even include over-the-counter medications, most dental services, and long-term care. The Employee Benefit Research Institute figures a married couple will need a staggering $305,000, just to have a 90 percent chance of being able to pay for all out-of-pocket retirement health expenses (the money could be paid in part out of retirement income, however.)
Dickinson, who recently signed up for Medicare, runs a website for fellow GM retirees, where he posts tips for navigating the sign-up process. After GM announced retiree health-insurance cuts, the site's traffic quadrupled.
"The older retirees losing their benefits are trying to do the gymnastics required to enter the Medicare maze," Dickinson says. "You've got to go to each provider and determine which one has the best coverage for you and at what premium price. It's very confusing."
4. Consider working longer. Many economists think most people should plan to work well past the current average retirement age, 63, in part to help finance health expenses. Working longer allows you to funnel extra cash into your nest egg, gives your investments more time to recover from recent market losses, and cuts the length of time your retirement stash needs to last.
Workers age 50 and older can deposit up to $22,000 in a traditional tax-deferred 401(k) this year, up $1,500 from 2008. Social Security benefits also increase for each year you delay claiming benefits up until age 70.
"People simply can't afford to cover their future health-care costs unless they have more assets, and people are responding to that by working longer," says Richard Johnson, an Urban Institute researcher.
There is some evidence that continuing to work at a challenging--but not stressful--job or staying active and engaged by volunteering or taking up hobbies can help you stay healthy even longer.
"Mental and physical exercise improve overall brain fitness," says Gene Cohen, director of the Center on Aging, Health, and Humanities at George Washington University. "Mastery and a sense of accomplishment can improve mental fitness by boosting the immune system."
5. Factor in long-term care. What's often the greatest retiree medical expense of all--long-term care--generally isn't covered by Medicare. Last year, a private nursing home room cost an average of $76,460 a year, or $209 per day, according to a Genworth Financial survey. Costs vary considerably by state, and range from an average of $125 a day in Louisiana to $515 in Alaska.
More inexpensive options are available, but even they could torpedo most retirees' budgets. The average rate for a home-health aide is $19 an hour. That comes to $43,884 per year for 44 hours a week of care. A private one-bedroom unit in an assisted-living facility typically costs $36,090 annually. And the most frugal long-term care option, adult day care, still runs $15,236 per year, on average, for care five days a week, Genworth Financial found.
6. Consider long-term care insurance...carefully. Long-term-care insurance can help protect you from some of these catastrophic costs--at a hefty price. AARP estimates that a 65-year-old in good health can expect to pay between $2,000 and $3,000 a year for a policy that covers nursing-home and home care. And Fidelity Investments calculated that a couple, both 65 in 2008, would need $85,000 just to insure against a lifetime of long-term-care expenses.
Before you buy long-term care insurance, you should get answers to plenty of questions: how to cancel the policy; what happens if you stop paying the premiums; how many times you can renew; how long coverage lasts; what the maximum payout is (and whether it is indexed for inflation); and what needs to happen before you can begin claiming your benefits.
"These policies are written stating very extensively what they will cover, and 20 years later when you start using long-term-care services, there may be some new modality of service that is not covered by your plan," cautions Johnson. You can check up on the financial health of insurers at A.M. Best, Moody's, or Standard and Poor's and with your state insurance department.
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7. Go it alone. Retirees who find that they can't afford their medical needs sometimes choose to delay or go without necessary care. A Kaiser Family Foundation study found that some Medicare Part D enrollees who reached the "doughnut hole" gap in prescription drug coverage simply stopped taking their medication.
For example, of those taking medications for specific conditions, 10 percent stopped taking oral anti-diabetic drugs, 18 percent gave up osteoporosis medications, and 20 percent discontinued the use of proton pump inhibitors to reduce gastric acid. But failing to treat a chronic condition will inevitably lead to higher health care costs in the future.
8. Invest in your health. Another answer to limiting the cost of health care is to take good care of yourself. There are no guarantees, of course, but in general a healthful diet and plenty of exercise will not only help you enjoy life but make living more affordable, too.
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