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How to Budget For Health Care Expenses in Retirement

Joanne Cleaver

Should you plan on getting healthier once you retire, or is it smarter to work on wellness in advance? New research indicates that entering retirement in good health can result in a major cost savings: Those who retire in good health may need 19 percent less money over the course of retirement than people with chronic conditions and bad habits, according to a 2013 Fidelity Investments Retirement Savings Assessment survey of over 2,265 working households earning at least $20,000.

Plotting a financial return on wellness is a new thought for most near-retirees, financial advisors say. Here's how to integrate this insight into your plans.

Certified financial planner Elaine Bedel, based in Indianapolis, has seen clients take two typical approaches to retirement health expectations: postponing a wellness makeover until retirement and adopting wellness in anticipation of retirement. One of her clients retired from a stressful job that involved many meals eaten on the road. He promptly lost 50 pounds once he was able to adopt a daily exercise plan. But another of Bedel's clients made a late-career shift from a physically exerting nursing job to a deskbound position and found her stamina and physical condition deteriorating. She started a diet and exercise regime so she could retire strong.

[Read: How Helpful Is Your Employer's Financial Wellness Program?]

The second approach is more likely to yield results for both your waistline and income, says John Sweeney, executive vice president of retirement and investing strategies for Fidelity Investments. "The link between fiscal and physical health is important. You have time to maintain or improve your health before you retire," he says.

The big difference in the two approaches, he says, is in the cost of addressing chronic conditions. Once you develop, say, heart disease or diabetes, the related costs become part of your core expenses. When added on top of predictable expenses such as housing, food and health maintenance, the cost of chronic conditions can absorb income you had hoped to have for travel, lifestyle and a financial cushion.

"Health is a big factor that can swing your income substantially," Sweeney says.

Health care costs are the wild card for most retirees. A study released in May 2013 by the Society of Actuaries, which used data from the Health Care Cost Institute, predicted that health care costs in retirement are likely to hit $146,400 for those who retire at age 65 and live for another 20 years.

A good place to start with a preretirement health strategy is to scope out the likely conditions you might develop so you can create a preventive plan accordingly, Sweeney says. The most common chronic ailments in retirement are asthma, cancer, heart disease, stroke and diabetes, according to a 2005 paper, "Do the Sick Retire Early?" by West Virginia State University professors M. Solaiman Miah and Virginia Wilcox-Gök.

[Read: Boomers Need to Talk About Long-Term Care.]

Examining your family history is another way to predict your health trajectory in retirement, Bedel says. Health usually comes up in financial planning conversations when you are discussing with your planner how long you are likely to live and how far your money must stretch, she says. "If you recognize that something runs in your family, you know what your options are and what you can do to delay the onset," Bedel says.

Here are steps you can take now to improve your wellness and reap a healthy return after you retire.

-- Think through your social support system for making healthy decisions, experts say. If you realize that professional colleagues help you choose salad over a burger at lunch, how can you make the most of peer support to ramp up your wellness efforts a notch? Also, how will you replace that support system once retired, so you can maintain current good habits? "Get some healthy peers outside of work and start changing your habits," advises Angela Curl, an assistant professor at the University of Missouri's School of Social Work and a leading researcher on retirement satisfaction.

-- Research your greatest health risks and adjust your wellness plan accordingly. Curl says it's important to understand how health factors evolve as you age. For example, it's actually healthier for older adults to carry a little more weight because it can cushion them from falls and illness.

-- Make the most of wellness benefits offered at work. Employer-subsidized programs designed to break bad habits (such as smoking or overeating) or establish good ones (like on-site yoga classes and nutrition counseling) are convenient and inexpensive modes of gaining momentum to carry you into retirement.

-- If elective surgery, such as joint replacement, looms in the near future, consider having it done before you retire, while you are covered by a familiar insurance and health care system.

-- If you have a health savings account at work, make the most of it for preventive cases, Sweeney advises, because you'll be spending at pretax rates while tallying key health benchmarks.

-- Shift your daily habits to proactively address the health conditions you think are most likely to emerge after you retire. For example, research published in April by the American College of Rheumatology found that women can strengthen their knees by frequently drinking low or nonfat milk.

-- If you don't have enough money set aside to cover at least three years of assisted living (either at home or in a facility), consider getting long-term care insurance, Bedel says. She notes that many states offer policies that complement Medicare. Local financial advisors are likely to be conversant in such plans.

[See: 6 Steps to the Retirement Lifestyle You Want.]

"Retirement is a great opportunity to make changes, but unless you are very intentional about it, you'll probably carry forward the habits you already have," Curl says. "If you want to be active in retirement, be active now."

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