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Budgeting for Healthcare in Retirement

Elderly Hands

While the precarious long-term financial health of the Social Security system gets most of the press, the Medicare system is on an equally uneven footing. According to the latest report from the Social Security and Medicare Boards of Trustees, Medicare is projected to exhaust its assets by 2029.1

In 2007, the latest year data is available, Medicare covered less than two-thirds (64%) of the health care services for beneficiaries age 65 and older. The rest of the costs were paid by the recipient, either out-of-pocket, via private insurance, or from other sources.2

And those costs can really add up. The Employee Benefit Research Institute (EBRI), a nonprofit organization that studies employee benefits issues and trends, has estimated that a 65-year-old couple who retired in 2010 needs to have saved at least $158,000 to have a 50% chance of having enough money to cover their out-of-pocket health care expenses and health insurance premiums in retirement. To have a 90% chance of meeting those costs, the total rises to a staggering $271,000.

The projections for those nearing retirement are sobering. EBRI estimates that a 55-year-old man needs to save in the range of $109,000-$354,000, while a 55-year-old woman should set aside $147,000-$406,000.

How much you will need depends on a variety of factors, many of which may be out of your control. They include:
 

  • Your retirement age,
  • Your health status and life expectancy (women on average live longer than men and thus need to set more aside for health care costs),
  • The availability of coverage you can obtain to supplement Medicare, and
  • The rate at which health costs increase.

While currently 90% of all Medicare recipients receive some form of insurance coverage to supplement Parts A and B, employers are increasingly phasing out coverage for retirees.

And Medicare costs continue to rise. Over the past decade, Medicare Part B premiums have averaged an annual increase of about 10%. Premiums are projected to increase by 8.7% in 2011. While future forecasts call for increases in a more reasonable 4%-4.5% range, at that rate, costs would double in about 15 years.2

When doing any retirement needs assessment, be sure to include potential health care costs in your budgeting. A little preparation today can help reduce unpleasant surprises tomorrow.

1Source: Social Security Administration, 2010 Social Security and Medicare Trust Fund Reports, August 2010.

2Source: Employee Benefit Research Institute, Issue Brief, December 2010.

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