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Tackle retirement health costs early

Tackle retirement health costs early

Would you happen to have a spare $220,000 on you? That lofty sum is what Fidelity estimates the average husband and wife, both age 65 and retiring this year, would need in current dollars to afford medical expenses for the rest of their lives. It’s a figure that gets mentioned in the news a lot, underscoring the fact that those planning for retirement may want to ramp up their savings. (I’d wager that Fidelity executives hope those savings will be invested with the company.)

But which estimate of health care costs is realistic for you? And how do you ensure that you’ll have enough?

Let’s look at how Fidelity arrived at its estimates for the couple above. The company used actuarial tables to assume that the husband would live until age 82 and the wife until 85. It projected what they might spend by extrapolating from a Medicare database of medical claims.

But the $220,000 benchmark may actually be too low because it doesn’t include dental costs, notes Sunit Patel, the senior vice president for Fidelity’s benefits consulting group. It also doesn’t take into account long-term care or Medigap. On the other hand, Fidelity doesn’t figure in the cost savings that some retirees get because of employer-provided coverage. “It’s just to give people a starting point,” Patel explains.

For a more personalized estimate, try AARP's free Health Care Costs Calculator. I found the tool to be simple and enlightening. On the first page, I plugged in some personal information, though nothing that identified me. On a second page, I input health conditions I might have now or later in life. The third page projected how much I—and Medicare—would pay. I'm 57 and in good health, but my estimate for a 30-year retirement starting at age 67 showed a scary $218,501 total. When I gave my current age as 67, the figure dropped to $174,658.

AARP's Calculator has limitations. For instance, it asks for your state of residence, but average health care costs can vary within a state. Still, it gave me more to hang my hat on and reminded me to ask my financial planner how he figures out health care costs.

Leonard Wright, a CPA and Personal Financial Specialist in the Las Vegas area, says he queries clients about their health, their parents' health, and future concerns. Using software to make projections, he applies a hefty 7 percent inflation rate to current estimated costs. He also expects that discretionary spending will drop with age. "This allows for greater funding of medical expenses," he notes. 

To research out-of-pocket costs for a Medicare Advantage plan, go to Medicare's Plan Finder. Entering some information, including your medications, will yield available plans and detailed estimates. (For Medigap, out-of-pocket costs are determined by a specific plan's design. Plan "F" requires nothing out of pocket if you don't choose the high-deductible version.)

Consumer Reports' Retirement Planning Guide can help you make your second act fulfilling and financially secure. 

Aside from finding the right insurance and upping retirement savings, another option to help fund medical costs is a health savings account. To be eligible, employees and self-employed workers must have a high-deductible health insurance plan (currently with annual deductibles of at least $1,300 for single people and $2,600 per family).

You and your employer can put money into your HSA. The maximum contribution is $3,350 in 2015 if you’re paying for single insurance coverage and $6,650 if you’re maintaining family coverage. (If you were at least 55 last year and haven’t yet enrolled in Medicare, that maximum is $1,000 higher.) The money can be invested as in a 401(k). Employer contributions are tax-free; your contributions are tax-deductible even if you don’t itemize. You can take the balance with you when you leave your job, and you pay no tax on withdrawals used for “qualifying” expenses (sorry, no tummy tucks).

But depending on your family’s medical costs, you might not have much left in an HSA by retirement. That’s because the accompanying high-deductible health plan can charge singles up to $6,450 per year in out-of-pocket expenses, excluding premiums; for families, it’s up to $12,900 per year.

One way to save is to delay retirement. Fidelity says that its hypothetical couple would save $20,000 by waiting until age 67.

And, of course, healthy habits can prevent or mitigate costly, chronic conditions. According to AARP’s tool, high blood pressure, high cholesterol, and an unhealthy weight would cost me $27,763 more during my lifetime.

Time to hit the gym! 

—Tobie Stanger (@TobieStanger on Twitter)

This article first appeared in Consumer Reports Money Adviser.

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