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By Christine Benz | 05-27-2010 10:00 AM

How Much for Health Care in Retirement?

Health care is going to be a significant out-of-pocket expense for everyone, Medicare or not, says retirement author Mark Miller.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Part of the challenge of planning for retirement is that you're planning for unknowables. You don't know how long you'll live, and you don't know how healthy you'll be in retirement. Here to shed some light on the second question is Mark Miller. Mark is a retirement specialist, and he's also the author of a new book called the "The Hard Times Guide to Retirement Security."

Mark, thanks so much for being here.

Mark Miller: Thank you, Christine.

Benz: Mark, let's talk about people who are already eligible for Medicare, and trying to factor in what those costs will be and how much they should set aside specifically to cover their costs.

Miller: I think one of the misunderstandings a lot of people have about Medicare is once they get on Medicare everything's great, everything's covered. The reality is that health care is going to be a significant out of pocket expense for everyone, Medicare or not. Studies suggest that for the average 65 year old couple, the going forward health care expense for the rest of their lives will be somewhere in the neighborhood of $200,000.

That comes in the form of premiums for certain parts of Medicare, basically traditional Medicare, and then also for the add-on things people buy like the prescription drug program and other kinds of insurance add-ons, not to mention just other kinds of out of pockets, so over-the-counter things.

That figure doesn't include long-term care insurance, which is a whole other topic that we could talk about some time.

One of the difficulties with Medicare is that we've expanded it from the traditional program to include some things that are complex and difficult to shop for. For example, the prescription drug so called Part D plan is something that's very complex. For people who live in a typical big metro market, you might be looking at 40 or 50 different plan choices.

It's actually something people need to shop for annually, unfortunately, because the rules allow the insurance companies the change what's called the formularies, or what the allowed drugs are, what drugs are allowed under the plan. They can change annually, not to mention your own needs might change, your prescriptions might change.

There's an open enrollment every fall from Nov. 15 to the end of the year in which people can shop and make a change. There's a great tool on the Medicare.gov website, for people who are web savvy, that can really help you understand that.

But if you don't pick the right plan, it can make the difference of a couple thousand dollars a year in premiums. It's a big deal.

Likewise, there's the whole Medicare Advantage option, which is a choice to get out of traditional Medicare into more of a privately managed PPO option. Same kinds of issues around shopping those plans. So a lot of complexity in Medicare.

For people who are younger than 65, it's even tougher because people who have lost jobs and are no longer in group insurance plans...

Benz: And that's a growing group, unfortunately.

Miller: ...in their 50 and on up to 65 really have had it rough during this recession. A lot of them have struggled to keep up with COBRA premiums and the like. The good news is that the new health insurance reform law contains some important improvements there that will be phased in over the next few years and should make things a lot better for those folks, giving them access to the public exchange option, and also the elimination of the preexisting condition rules.

So things should be getting better for people in that bracket over the next few years.

Benz: In terms of calculating what someone's costs might be for health care in retirement, should they stick with that $200,000 number, use that as a baseline for planning?

Miller: Yes, because I think it's clear that health-care expense, unfortunately we have not gotten a handle on yet. There are some attempts to start getting a handle on expense costs in the new health-care reform law, but it's going to be a long-term battle. I think we all need to assume that it's something we need to plan for, and if possible to crank it into your saving plans is about all we can do.

Benz: If long term care is part of the plan, you'd need to crank it that much higher.

Miller: Yes. Briefly on long term care, it's best if you're going to buy it, and a thing worth looking at is to do it in your 50s while you can still get it at a reasonable premium.

Benz: Well, thanks, Mark. Those are helpful pointers. We appreciate you sharing them with us.

Miller: Thank you.

Benz: Thanks so much for watching. I'm Christine Benz for Morningstar.com.

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