Financing health care in retirement must be central to retirement planning, particularly as companies continue to trim retiree benefits, according to Fidelity Investments.
A 65 year-old couple retiring in 2008 would need approximately $225,000 to cover their medical expenses in retirement, a 4.7% increase over the 2007 estimate of $215,000, reports Fidelity, a Boston-based mutual fund company.
Reasons for the jump in cost over the past year stems from higher charges for doctor's visits and higher utilization rates. Additional factors include rising costs associated with new technologies, such as better diagnostic testing, prescription drugs, as well as an increase in certain chronic conditions, such as diabetes.
Since Fidelity first started calculating the retiree health care cost in 2002, the figure has risen 41%, with an average annual increase of 5.8%.
Successfully managing retiree health care costs "will take a very personalized approach to planning on the part of the individual," remarks Brad Kimler, executive vice president of Fidelity.
Fidelity offers five steps to help consumers prepare for these high costs:
Create an individual retirement plan – Workers can factor in specific circumstances, such as current savings, anticipated income sources, lifestyle and expenses.
Start early and maximize opportunities to save – Enrolling in a tax-advantaged account, like a health savings account, could allow individuals to pay for medical expenses on a federal tax-free basis.
Assess health status and become a smarter consumer – Individuals should consider more cost-efficient options, such as generic drugs compared to brand-name drugs, and maximize preventive services to avoid the emergency room.
Determine details of any employer-sponsored coverage – Those who have access to such coverage should understand the scope, extent and duration of their coverage.
Understand the financial impact of health care costs on Social Security income – A 65-year-old earning $60,000 who decides to retire at the end of the year should expect that 50% of his or her pre-tax Social Security benefit will be used to pay for personal health care expenses in the next 17 to 19 years.
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