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Think you won't have to worry about health care costs once you're covered by Medicare?
Women who retired last year will need an average of $93,000 in savings to pay for health care expenses in retirement, according to an estimate by the Employee Benefit Research Institute. Men will need $65,000.
That's an average. And that's just for the people who retired last year. The amount will be considerably higher for people retiring in coming years. And these estimates don't include the cost of a nursing home or other long-term care.
Yet few people are aware of how much they will spend on health care in retirement despite being covered by Medicare.
"They don't have a clue," said Jim Fritsch, a retiree. "They're not ready for it."
Fritsch spends a bit more than $300 a month on supplemental insurance, and he's fairly typical.
Premiums for supplemental insurance, or Medigap, cost $2,160 to $2,700 a year in the Milwaukee area for someone who is 75. Medicare Part B, which covers physician fees and other services, runs $1,157 this year. And Medicare Part D, the prescription drug benefit, averages $528 this year in Wisconsin.
That works out to $3,845 to $4,385 a year -- $7,690 to $8,770 for a couple -- at the age of 75.
That doesn't include deductibles or expenses for dental care, eyeglasses or hearing aids.
The cost can be considerably less for people who opt for a Medicare Advantage plan in place of Medigap insurance. But those plans typically have higher deductibles than Medicare supplemental plans.
"It takes a good chunk out of your savings," said William Reeves, 78.
One in four people covered by Medicare spent 30% or more of their income on health expenses, including long-term care, in 2006, according to a brief by the Kaiser Family Foundation, which does research on health policy.
That percentage is certain to increase as the rise in health care costs continues to outpace incomes.
Median out-of-pocket spending on health care -- meaning roughly half will spend more and half less -- is projected to reach 19% this year and to exceed 25% of retirees' income in 2020.
Those figures include long-term care, which costs more than $70,000 a year. It's a cost that few people can bear for long, and that everyone hopes to escape.
Yet an estimated 24% of the people who retired last year will need more than a year of nursing home care, and 9% will need more than five years of care, according to the Center for Retirement Research at Boston College.
Medicare in disrepair
All this awaits retiring baby boomers -- a sizable number who haven't saved enough for retirement and who are less likely to have pensions.
At the same time, Medicare is seriously underfunded. And economists across the political spectrum agree that the program in its current form isn't sustainable.
"The fact is the program is not solvent, and there are going to be changes to it at some point," said Paul Fronstin, a senior research associate with the Employee Benefit Research Institute. "The question is what those changes will look like."
House Republicans, spearheaded by Rep. Paul Ryan (R-Wis.), have proposed capping the value of Medicare coverage in future years. That would shift some costs to future retirees, although Ryan's proposal would include subsidies for people with limited incomes.
For their part, Democrats have placed their hopes largely in slowing the rise in Medicare spending through a mix of price controls and reforms to make the health care system more efficient.
What is clear is no one expects Medicare coverage to become more generous. The result could be larger co-pays, higher premiums and fewer benefits.
"One way or another, it comes down to needing more money," said Anthony Webb, a research economist with the Center for Retirement Research at Boston College.
Yet many people already are spending a large share of their income on health care, and that percentage will increase even without significant changes in Medicare.
How much more some people can afford is a question.
Half of all Medicare beneficiaries had incomes of less than $21,000 last year, according to the Kaiser Family Foundation. They also had few assets.
Among those covered by Medicare, half had:
Less than $2,095 in retirement accounts.
Less than $60,025 in home equity
Less than $30,287 in financial assets,
"I don't see how some make it," said Reeves, the retiree.
Reeves, who has a pension, knows he's relatively lucky. But health care costs still are a major expense for him.
"I didn't expect it to be this costly," he said. "And the older you get, the higher it goes up."
What someone will spend on health care in retirement varies wildly and is impossible to predict. For certain, the burden is heaviest for those who are the oldest, in poor health or with modest incomes. But it also depends on when people retire, how long they will live, their health and, to a large degree, fate.
The biggest unknown is how long someone will live. But 50% of the women who turned 65 last year are expected to live to 84, and 25% are expected to live until 90. For men, 50% are expected to live to 81 and 25% to 87.
That complicates projecting future expenses.
"Everybody sort of thinks they are going to do well," said Pamela Herd, an associate professor of public affairs and sociology at the University of Wisconsin-Madison.
Most people expect to work longer. But whether they will have that option varies with educational level and health. And Herd noted that studies show that older people face discrimination in the job market.
The biggest wild card is long-term care.
"For most people, long-term care insurance is Medicaid," Herd said.
Roughly two-thirds of the people in Wisconsin nursing homes are covered by Medicaid.
That's not a heartening prospect. People must deplete their assets, and any income from Social Security or a pension goes toward the cost of their care. They are allowed to keep $45 a month for personal expenses.
"That's the biggest financial risk for a senior," said William Kravit, president of FHK Senior Insurance Services in Milwaukee.
Long-term care insurance is an option, but the policies are expensive and complicated.
Even people lucky enough to avoid the cost of long-term care are likely to find themselves spending more on health care in their retirement than they ever expected -- and the expense is almost certain to be a lot more in coming decades.
"To make it, you are going to have to have a lot of money in that bank when you retire," Reeves said.
Copyright (c) 2011, Milwaukee Journal Sentinel
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