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Paycheck Chronicles

Understanding the Military Family Leave Under FMLA

If you’re a military spouse, and you are employed, you should get to know the Military Family Leave┬áprovisions of the Family and Medical Leave Act...

Retiring? Make Sure Health Care is Paid For

Thanks to modern medicine and healthy living, people live longer lives. But with the benefits of longevity come increased costs in health care. And as cost continue to grow, employers and the government will look to individuals to pay for their own medical expenses. That's why it's important to take health care expenses into account now as you plan for your retirement.

The cost of health care is projected to jump to more than twice the rate of inflation for the foreseeable future. The Center for Strategic and Budgetary Assessments reports that health care makes up $47 billion in military spending, and it expects costs to rise 5 percent to 7 percent per year. While health care coverage is provided by the military to retirees, not all costs are covered.

If you're worried about being able to afford adequate health care and maintaining a reasonable standard of living during retirement, you're not alone. Concern about the cost of health care is near the top of the list for many retirees, according to the Society of Actuaries' 2007 Risks and Process of Retirement Survey.

The First Command Financial Behaviors Index® reveals that nearly three out of four middle-class Americans are at least somewhat concerned about health care costs in retirement, with those closest to retirement expressing the most concern.

Respondents predict they'll need about an additional $33,000 to cover health care costs during retirement. While significant, this estimate is a fraction of the out-of-pocket expenses Americans will likely face in retirement.

And don't count on your employer to help. Not all employers provide their retirees with a subsidy for health insurance coverage. And, even if you or your spouse will have coverage through your employer, you'll probably be responsible for premiums, deductibles and copayments amounting to substantial out-of-pocket expenditures.

What about Medicare? Medicare provides coverage starting at age 65. So, if you plan to retire early, keep in mind that you won't be eligible right away. Once Medicare does kick in, it won't take care of all of your health care needs.

Current premiums for Medicare Part B, the average for Medicare Part D and the maximum out-of-pocket drug costs before Medicare Part D begin paying 95 percent of drug costs total $5,842 per year.

This means that if you retire today you'll receive a 5 percent return on savings and an average premium increase of 3.7 percent (the Part B increase rate through 2016). What's more, an individual retiring at age 65 and lives to age 100 would need an estimated $166,000 to meet these expenses. For a couple, the figure doubles to $332,000.

The actual need could be considerably higher. In a May 2008 study, the Employee Benefit Research Institute employed a Monte Carlo simulation model to estimate the savings needed to fund health care costs in retirement. The Institute determined that a couple who retired in 2008 at age 65 would need $635,000 in savings to cover Medigap premiums, Medicare Part B and Part D premiums and out-of-pocket drug expenses. And a couple retiring in 2018 at age 65 will need more than $1 million.

While illuminating, these estimates alone should not be used to set savings goals for health care expenses in retirement. Your individual needs are contingent on many factors, including:

  • Age at retirement
  • Life expectancy at retirement
  • Availability of health insurance in retirement
  • Health of the retiree
  • Health care cost rate increases
  • Interest rates
  • Rate of return on investments
  • Public policy changes

Perhaps the greatest challenge in planning for health care expenses in retirement is uncertainty. Lifespan is uncertain. Health care cost increases are uncertain. Inflation is uncertain. Interest rates are uncertain. And health status is uncertain.

As workers and retirees become increasingly responsible for their own retirement, the risk of uncertainty will make the planning process increasingly complicated. Financial Advisors have the tools and expertise to help you estimate how much you should set aside to cover medical expenses in retirement. By making sure you take into account the higher costs of medical expenses, you can better prepare now for the standard of living you desire for your retirement years.

For more retirement-planning advice, visit Military.com's Banking and Savings channel.

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