Don't Let Health Care Wipe Out Your Savings

As people live longer and medical costs increase, people
nearing retirement worry that paying for health care will wipe out
their savings.

Close to a third of people 50 and older are not confident
they will be able to pay for health care and long-term care in
retirement, according to the AARP's 2005 The State of 50-plus America
report.

Health is a key budget challenge, said Jules Lichtenstein,
AARP senior policy adviser.

An unexpected ailment late in life is a wild card that can
derail the best of retirement plans.

Some people are forced to adjust their lives to retain or pay
for health care, including working past retirement age, burning through
savings, or going into debt.

"There are people who will need to work, people who will be
economically strapped," said Helen Dennis, a specialist on aging,
employment and retirement who lectures at the University of Southern
California.

One of the things that will keep people working is
uncertainty over whether they will have complete health care coverage
in retirement, Dennis said.

Retirees often rely on company-provided healthcare plans.

Even those who qualify for Medicare often use company plans
to pay for things Medicare doesn't.

Free Medicare hospital insurance is available for those 65
and older. Fewer future retirees may have the option of health care
coverage from their former employers.

About 36 percent of large employers offered health benefits
to their retirees in 2004, down from 66 percent in 1988, according to a
Kaiser Family Foundation report. Often the cuts are tied to higher
health care costs.

"If it's a choice between providing existing workers with
benefits or retirees with benefits, they're probably going to decide to
give it to existing workers," Lichtenstein said. "That's a real
problem." Michelle Strollo, senior policy analyst with the Kaiser
Family Foundation, said most companies try to protect their current
retirees even if they cut benefits for future retirees. But even those
who have coverage can be affected by increased premiums, co-pays or
deductibles.

That means workers should be planning for healthcare expenses
in retirement, either with or without employer-provided coverage,
Strollo said.

Retirement Health Care Statistics

• Among people 50 and older, 27 percent are not confident
  they will be able to pay for health and long-term care in retirement.
• Health insurance premiums rose 11.2 percent in 2004.
• A typical worker who retired at age 65 in 2004 would pay
  $2,244 a year in premiums, 27 percent more than a worker who retired in
  2003.
• Among those 65 and older, 22 percent said medical bills,
  including prescription drugs, were a financial problem.
• Among those 50 and older, 26 percent said they cut back on
  discretionary spending, such as a dining out, because of medical bills;
  19 percent used savings not intended for medical bills; 7 percent cut
  back on food or housing; 9 percent borrowed or went into debt because
  of their medical bills; and 1 percent filed for bankruptcy.
• Among companies with 200 or more employees, 36 percent
  offered healthcare coverage to retirees in 2004, down from 66 percent
  in 1988.

Sources: The State of 50-plus America report, AARP;
"Current Trends and Future Outlook for Retiree Health Benefits," Kaiser
Family Foundation.

Common Retirement Investment Terms

• Pension: A fund set up and overseen by
  an employer or union to provide retirement income for workers. Workers
  don't have control over the fund's investments.
• IRA: An individual retirement account,
  created through a bank or brokerage firm, that allows pretax deposits.
  Earnings are taxed at withdrawal, which generally assumes a lower
  income tax bracket for an individual at retirement.
• Roth IRA: A private retirement account
  that uses after-tax dollars, but grows tax-free and is withdrawn
  tax-free.
• 401(k): An employer-sponsored
  investment program that allows employees to contribute pretax money to
  investment accounts. Employers often match a certain percentage of
  employees' contributions. Employees generally have a menu of investment
  choices and can move money to a different program if they change
  employers.
• Annuity: A contract with a private
  firm that guarantees monthly or annual payments for life. An example
  would be a 20-year annuity that is purchased for a lump sum and will
  provide payment for life, or to heirs for any remainder of the 20
  years. Annuities generally do not collect further interest after the
  withdrawal period, but can be used as a savings device before
  retirement.
• Defined benefit plan: A plan,
  otherwise known as a pension, provides a specific benefit for retired
  employees, either as a lump sum or as income for the rest of their
  lives. The pension amount usually depends on the employee's age at
  retirement, final salary, and the number of years on the job. All the
  details are spelled out in the plan.
• Defined contribution plan: A pension
  plan in which the employer makes regular contributions of a specified
  amount of money. In contrast to a defined benefit plan, it does not
  promise employees any specific amount of retirement benefits. The
  employee's retirement benefit will depend on how much was contributed
  to his or her account, and how the plan's investments performed over
  the years.

Source: Ventura County Star.
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