8 Tips for Paying for Health Care in Retirement

With retiree benefits vanishing, there's even more reason to save for future medical costs.

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It’s difficult to predict what your health care expenses will be in retirement. Jack Dickinson, 65, thought he was one of the lucky ones. His 34 years as a General Motors sales and marketing manager came with two gold-plated benefits: a pension and lifetime medical coverage. And Dickinson was lucky indeed--until GM scrapped retiree health care coverage this year for about 100,000 white-collar retirees, him included. The beleaguered auto giant did raise monthly pension payments by $300 to help retirees buy their own coverage. But "it does not replace, by any means, the excellent coverage that GM gave us," says Dickinson, a retiree in Hoover, Ala. "If you go on the open market and try to replace everything, it is not available." Here’s some tips on how to cope with health care expenses in retirement:

Don’t count on employer benefits. Most current employees will never face Dickinson's quandary because they won't be eligible for retiree health insurance through their former employer in the first place. Less than a third of firms with 200 or more workers offered retiree health benefits in 2008, down from the 66 percent that did so in 1988, according to a Kaiser Family Foundation survey. Among small companies, retiree coverage is much more rare: only 4 percent offer it. But even if your employer offers retiree health insurance, don't count on receiving benefits. Retiree health insurance agreements often include clauses that give the company the right to modify or terminate the program at any time. If benefits continue, retirees are likely to face higher premiums, increased out-of-pocket expenses, and tougher eligibility requirements. And there's nothing that safeguards retiree health insurance benefits like the federal Pension Benefit Guaranty Corp., which, in private-sector pension plans, pays workers if a plan or a company fails.

Try to make it to Medicare. How do you protect yourself from crippling medical bills in the face of nonexistent or disappearing health insurance? The answer might seem to be seeking out an employer that provides health care benefits until age 65, when you qualify for Medicare. Sounds simple enough, if you can manage to stay employed with company benefits in this tough economy. If you're laid off, find out if you're eligible for a spouse’s health plan and COBRA continuation coverage through your former company. That coverage lasts up to 18 months. The American Recovery and Reinvestment Act, passed in February, promises employees who were laid off between Sept. 1, 2008, and Dec. 31, 2009, a 65 percent subsidy toward COBRA premiums for up to nine months.

Workers who retire before they qualify for Medicare at age 65 often face the steepest health care costs. The average cost of premiums for employer-provided coverage for retirees under 65 is $13,308 a year, according to a Towers Perrin survey. The typical early retiree is expected to pick up $6,960 of that tab. But retirees who don't have employer-subsidized insurance or coverage through a spouse will pay even more. Costs vary widely for individuals. Those who have bad health habits or chronic illnesses generally pay more--if they can even get coverage.

[See 7 Ways Laid-Off Baby Boomers Can Find Health Insurance]

Plan for Medicare costs. Retirees with Medicare face significant out-of-pocket costs. Major health care expenses include premiums for Medicare Part B (physician and outpatient hospital services) and Part D (prescription drug-related expenses), co-payments, coinsurance, deductibles, and excluded benefits like dental care, eyeglasses, and hearing aids. A couple retiring in 2010 would need nearly $206,000 in 2007 dollars to buy an annuity sufficient enough to cover out-of-pocket health care costs in retirement, according to the Center for Retirement Research at Boston College. A couple retiring in 2040 would need more than $491,000. Other studies come up with similarly large numbers. Fidelity Investments says a 65-year-old couple retiring in 2008 will need approximately $225,000 to cover medical costs in retirement. That doesn't even include over-the-counter medications, most dental services, and long-term care. The Employee Benefit Research Institute figures a married couple will need a staggering $305,000, just to have a 90 percent chance of being able to pay for all out-of-pocket retirement health expenses (the money could be paid in part out of retirement income, however.) Dickinson, who recently signed up for Medicare, runs a website for fellow GM retirees, where he posts tips for navigating the sign-up process. After GM announced retiree health-insurance cuts, the site's traffic quadrupled. "The older retirees losing their benefits are trying to do the gymnastics required to enter the Medicare maze," Dickinson says. "You've got to go to each provider and determine which one has the best coverage for you and at what premium price. It's very confusing."