Health-Care Trends You Dare Not Forget

By Martha M. Hamilton
Saturday, March 31, 2007

How do you envision retirement? Rock-climbing on weekdays, minus the weekend crowds? Sitting on the back porch knocking off the great books one by one? Or struggling to pay medical bills?

That last one may not rank high among retirement fantasies, but it's becoming a reality for more people as health-care costs rise and private-sector employers reduce spending on retiree health care.

If you retire before Medicare eligibility at age 65, with limited or no retiree health-care coverage, your options aren't great: You can buy a higher-priced individual policy or take your chances paying those doctors' bills. Even when Medicare kicks in, it doesn't mean your medical costs will be fully covered. The Employee Benefit Research Institute estimates that Medicare covers only 51 percent of expenses associated with health-care services for most individuals.

Fidelity Investments, which has been tracking retiree health-care costs since 2002, calculated in a report last week that a 65-year-old couple retiring this year will need about $215,000 to cover medical costs in retirement, up 7.5 percent from the previous year. For about 40 percent of the retirees whose primary source of income is Social Security, health expenses could eat up as much as half of their retirement benefits, Fidelity said. Some estimates of retiree health costs have been even higher.

An unexpected health crisis can take an even bigger bite out of retirement savings. Take the case of Pamela Votava. In her 50s, she developed post-polio syndrome, a progressive weakening of the muscles. On the advice of her doctor, she decided to retire in July 2004 at age 61 to help slow the disease's progress. Her husband was covered by Medicare, and Votava figured she could find private insurance to cover her costs. But the insurance companies she initially applied to turned her down.

"I had managed a medical office and thought I was pretty savvy on insurance," said Votava, who lives outside of Toledo. "When I found that I couldn't get insurance, it took me by surprise."

She was able to extend her employer health insurance temporarily for $675 a month, but her employer was too small to be covered by COBRA, a federal law that extends insurance coverage for many retiring workers. She was approved for Social Security Disability Insurance in January 2005, which also made her eligible for Medicare to cover her health costs. But there was a two-year waiting period between SSDI coverage and the beginning of Medicare payments. During that period she needed insurance to help pay for frequent doctors' appointments and for leg braces, which cost about $1,000.

Votava eventually was able to obtain coverage, but at a high price. Her premiums for the first year were $1,533 a month, rising the next year to more than $2,300. Although her family helped, most of the money came out of the couple's retirement savings -- money they had hoped to spend on travel or a bigger house. "It certainly had an impact on our retirement," she said.

Most retirees will have an easier time than Votava did in finding private insurance or will continue to be covered by their employers, both before and after they are eligible for Medicare. But that doesn't mean they won't face higher costs.

From 1994 to 2004, the median amount that retirees ages 55 through 63 paid in premiums for employer-provided insurance more than quadrupled, after adjusting for inflation, according a study authored by Richard W. Johnson, a research associate for the Urban Institute and the Center for Retirement Research at Boston College.

And the future looks even less promising. Noting that companies including General Motors, Ford, Chrysler, Nissan, Verizon and Sears had announced cuts in retiree health benefits for future retirees, Johnson concluded that "coverage appears to be slowly disappearing, possibly jeopardizing retirement security for future generations."

Workers thinking ahead to their retirement appear to be picking up on the ominous signals about future health-care expenses. A recent study by investment company Edward Jones found that nearly a third of Americans say not having enough to pay for health care in retirement is one of the biggest concerns facing the nation. Another study by PNC Wealth Management found that even the relatively affluent are worried: Forty-three percent of those surveyed who had investable assets of $500,000 to $999,999 said they're concerned that "health-care costs will ultimately consume a major portion of [their] financial assets."

Maybe as a nation we'll find a way to slow the increases in health-care costs -- but, judging by the record so far, the odds are against it. So if you're risk averse, you might want to tuck away more money to cover future health-care needs.

Any questions about retirement that you'd like to see explored in the column? Please e-mail me

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