Ready for Retirement?

No matter how healthy you are today, you’re going to need a bucket of money to help pay for health care costs in retirement, financial experts say.

For a 20-year retirement, a couple will need more than $200,000 to cover premiums, co-payments and other out-of-pocket health care expenses through Medicare or private insurance — and potentially much more if that insurance doesn’t cover high-cost drugs. It’s vital to try to get as close to that figure as you can before you hit retirement, financial experts say, or resort to an unpredictable patchwork of loans, credit or public assistance to cover health costs down the road.

One big gap in health care coverage for cancer survivors occurs when people in their late 50s or early 60s retire, are laid off or have their medical insurance cut back before they are old enough to qualify for Medicare, the federal insurance program for seniors, at age 65, says Win Boerckel.

"Many people are uninformed of exactly when Medicare kicks in," says Boerckel, MSW, LCSW-R, LIVESTRONG and national relations program director for CancerCare, a nonprofit organization that provides free support services to anyone affected by cancer. “Some think because they can take Social Security at age 62 that Medicare will start then. It doesn’t.”

Cancer survivors with a recurrence of the disease or some other major health complication in their senior years can have even more of a financial drain than the average senior, especially when dealing with the new Medicare Part D program for prescription drug coverage, according to Deane Beebe, spokeswoman for the Medicare Rights Center.

“The way the drug benefits are designed, it punishes the sickest people on Medicare,” she says. “When they hit the doughnut hole in coverage, they have no way to pay for the drugs they need."

Under Medicare Part D, a program launched in 2006, coverage will lapse after patients receive a total of $2,400 in prescription drugs through their plans; patients then have to pay 100 percent of the cost of covered drugs until their total out-of-pocket expenses reach $3,850 in 2007, not including drug plan premiums, according to Beebe. In addition, some cancer-fighting drugs are not covered at all, or have high co-payments, she says.

“The first year of Medicare Part D, people were caught by surprise and didn’t know the coverage was going to drop when they needed it most,” she says. “This year, people are more aware, but there are very few ways to protect themselves.”

Boerckel estimates that as many as 20 percent of retirees who call CancerCare’s hotline have financial problems because of Medicare’s gap in prescription drug coverage.

High drug costs are only one of the out-of-pocket expenses under Medicare that cancer survivors and others should know about.

Because a patient has to pay for deductibles, premiums, co-payments and excluded benefits, Medicare covers only about one-half of the total cost of health care in retirement, according to an issues brief released last year by the Employee Benefit Research Institute, a Washington, D.C.-based public policy group. Moreover, the estimate does not include costs associated with long-term care in nursing homes or at home.

The cumulative costs of premiums and other out-of-pocket health care expenses are not something most people consider before retiring, says Paul Fronstin, director of the institute.

“A lot of Americans have no idea what Medicare covers and what it doesn’t cover,” he adds.

Many people also don’t realize that they won’t be getting continued health insurance coverage from their company when they retire, Fronstin says. Or that those who do get the company coverage usually have to pay the full cost for it.

“We did a survey a few years ago that showed between 25 and 30 percent will get retiree health benefits, but 47 percent of workers expected retiree health benefits,” he says. “They have no idea that this is a benefit that’s disappearing.”

It’s difficult to nail down exactly how much you’ll need to cover health care costs in retirement. For one thing, it’s hard to predict how long you’ll live. Still, financial advisers agree that most people should prepare for about 20 years.

A recent estimate by Fidelity Investments says a 65-year-old couple retiring this year and enrolling in Medicare will need around $215,000 to cover medical costs over their remaining life span. The estimate is based on a couple who does not have employer-sponsored healthcare coverage in retirement, with the man expected to live 17 more years and the woman, 20.

Out-of-pocket costs estimated by Fidelity are broken down in about equal thirds:

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Roughly one-third would go toward covering premiums for Medicare Part B, which provides coverage for doctor visits and other outpatient care, and for Part D, the prescription drug coverage. (Medicare Part A covers a large portion of hospital expenses and has no premium for workers who have paid into the system while they were employed.)

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Another third of the $215,000 figure is likely to go to deductibles, co-payments, Medigap premiums and treatments or other care that Medicare doesn’t cover. Medigap is insurance offered to Medicare beneficiaries and generally covers the co-payments of Medicare. (A waiting period may apply for people with pre-existing conditions who were uninsured before they became eligible for Medicare.)

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The final third would cover out-of-pocket costs of prescription drugs. This includes medicines not covered by an individual’s Part D plan and the gap in coverage called the doughnut hole.

“Health care costs have to be the No. 1 expense in retirement for most Americans,” says Brad Kimler, senior vice president of Fidelity Employer Services. The amount needed is even higher — $295,000 — for those individuals with plans offered through their former employer, according to the Employee Benefit Research Institute. Those plans generally offer better benefits but also tend to have high premiums that a retiree pays, usually without the aid of the former employer, in addition to Medicare premiums.

In addition, studies of medical expenses show that cancer survivors and cancer patients pay more out-of-pocket costs than others, adds Ya-Chen Tina Shih, PhD, associate professor of health economics in the department of biostatistics at the University of Texas M.D. Anderson Cancer Center in Houston.

Another problem Shih sees regarding retiree medical costs is that many people don’t take advantage of what is offered under Medicare, particularly the cancer screenings, she says. Mammograms, colonoscopies and other major cancer tests are covered by Medicare, but minorities, particularly Hispanics, don’t always use them, she says.

“Medicare coverage of cancer screenings in general is good, but there’s a lot of patient education that needs to be done,” she says. “However, even with Medicare coverage, the co-payment for some screening procedures, such as colonoscopy, may still be excessive for low-income families.”

Financial planners advise that well before retirement — in fact, throughout their careers — people need to save money in their 401(k) retirement plans at work, individual retirement plans at home and, if you have a high-deductible health insurance plan, through individual health savings accounts that include funds set aside for healthcare costs in retirement.

A 401(k) can add up quickly. A 35-year-old worker putting away $300 a month with a 50 percent match and investment gains of 8 percent annually can accumulate a little over $1 million by retirement at age 67, according to the 401(k) calculator on the website of the Profit Sharing/401(k) Council of America at www.psca.org/401kday/calculator/calculator.html.

However, the estimate of how much a person will need in retirement to cover healthcare costs is far higher than the $22,500 median household retirement savings of American workers, according to the 2007 Retirement Index by Fidelity Research.

Those who wind up with high healthcare costs and not enough money will have to work hard to come up with the needed cash. Here are a few strategies suggested by financial advisers for people who can’t afford health care in retirement:

Check out the Hill-Burton care program. Under the program, money from the federal government was given to certain hospitals and other medical facilities, obligating the facilities to provide free or low-cost services for those unable to pay. Eligibility is based on family size and income. Contact the Health Resources and Services Administration at (800) 638-0742 or go to www.hrsa.gov/hillburton/.

Find out whether you are eligible for Medicaid. The federal program aims to provide health care for low-income people but has widely varying thresholds to qualify based on the state in which someone lives. For example, a pregnant woman in a family of three needs an annual income of less than $22,128 in order to qualify for Medicaid in Wyoming, while her counterpart in Minnesota can be covered with an income of up to $45,650, according to a recent report by Public Citizen Health Research Group. In addition, recent legislation has made it harder to shift assets to others to qualify for Medicaid. For more information, go to www.cms.hhs.gov/home/medicaid.asp.

Learn about your financial options involving life insurance policies. If you have permanent or cash value policies, they can be used as an asset to obtain a loan. Life insurance policies also can be transferred under a viatical arrangement, where the policy benefit is assigned to an investor for up-front cash.

Home equity loans and reverse mortgages. These are two different ways to borrow against the equity in your house. For details on reverse mortgages go to www.aarp.org/money/revmort/.

Credit cards. Keep cards only in your name, and if you face a large health care cost in retirement, make minimum payments only, although this is likely to hurt your credit rating. One strategy is to accept every credit card offer that comes in the mail for a reserve of funds, says New York City attorney David S. Landay, author of Be Prepared: The Complete Financial, Legal, and Practical Guide to Living With Cancer, HIV, and Other Life-Challenging Conditions. As a companion to the book, Landay is developing a website (www.SurvivorshipAtoZ.org) that will give answers to financial and legal questions.

“I don’t think people have a clue of the kinds of costs we’re talking about,” Landay says. “If they’re caught in high-cost healthcare that isn’t covered by insurance, they need to look at new uses of the assets they have.”

A lot of Americans have no idea what Medicare covers and what it doesn’t cover

Healthcare costs have to be the No. 1 expense in retirement for most Americans.