100_0012From the November 2013 AARP Bulletin

It could be a costly mistake if you aren’t considering health care costs in your retirement plan, financial advisers tell us. According to the latest estimate by Boston-based Fidelity Investments, premiums, deductibles and other out-of-pocket expenses could cost a 65-year-old couple retiring today a hair-raising $220,000 — and that’s after Medicare coverage kicks in.

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Yet we seem to be a little short-sighted. In a recent Fidelity poll of more than 1,800 people, nearly half of adults ages 55 to 64 believe they’ll need just $50,000 to pay for health care costs in retirement. A similar survey of 1,000 people ages 50 to 64 conducted by AARP shows that 42 percent believe they’ll need less than $100,000.

The good news is that AARP now offers a free online Health Care Costs Calculator that shows you what your out-of-pocket health care costs are likely to be in retirement, based in large part on certain medical conditions. You punch in your data — your current age and weight, the age at which you expect to retire, the number of years you expect to live in retirement and the medical conditions you think you might face, such as diabetes, hardening of the arteries or high blood pressure.

The calculator taps into a database of 82 medical conditions, and $136 billion in corresponding health care claims, to estimate the health care costs that are covered by Medicare Parts A, B and D, and the amount you’ll pay in out-of-pocket expenses.

Want to lower those costs? The tool shows you how making small lifestyle changes, like losing weight, can reduce what you’ll need to save because staying healthy costs less.

When I plugged in my numbers (and I might’ve been a tad optimistic), the calculator said that I’d need about $698,000 to cover my health care costs during retirement — $500,000 that’s paid by Medicare and $198,000 that I’d have to come up with.

Knowing how much we’ll need to save to pay for our medical costs is an extremely important piece in our overall retirement planning. This is particularly true as fewer employers are willing to provide health insurance for their retirees, so the responsibility falls on our shoulders. Even companies that still do offer retiree benefits tend to be less generous than in the past.

 “Health care costs can have a significant impact on retirement savings,” says AARP Vice President for Financial Security Jean Setzfand. “This calculator … aims to help more Americans confidently plan for and achieve their retirement goals.”

John Grosso is an actuary who leads the Retiree Health Care Task Force at Aon Hewitt, a consulting firm based in Lincolnshire, Ill. He says workers would be wise to stash away the maximum amount in their IRAs and 401(k)s to save for these expenses. He also suggests contributing the maximum each year to a health savings account (if your medical plan permits it), which allows tax-free savings and tax-free withdrawals for health care expenses.

He also says Medicare beneficiaries may want to consider buying a Medicare Advantage plan to cover those expenses that Medicare doesn’t. Premiums vary considerably, so be sure to compare costs between plans, he says.

“Most folks are not thinking about retiree health care as a specific need over and above typical retiree costs,” Grosso says. “You can get a feel for what your entertainment costs may be in retirement, your mortgage, your travel. But your out-of-pocket medical expenses are difficult to predict at times and it’s more challenging if you don’t have an employer covering a portion of the cost. Some people may need to get reemployed part time for the income or just to get the health care coverage.”

Prepare as much as you can and anticipate all your costs in retirement, Grotto says, so you can live a lifestyle that’s similar to the one you enjoyed before you stopped working.

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