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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."
WORK BONUS? 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.
HEALTH WATCH. 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
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