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Do You Have Enough to Cover Health Care Costs During Your Retirement Years?


When creating a nest egg to provide for retirement, many people underestimate a crucial retirement expense: health care. Rising health care costs play a significant part of retirement planning, especially as the average life expectancy continues to rise. The 2006 Merrill Lynch New Retirement Study found that many boomers plan to work in some capacity during their so-called “retirement years.” In fact, the average age of when individuals plan to stop work completely is age 70 or older. Individuals are planning to work longer for many reasons. Many hope that working will help them stay mentally (60 percent) and physically (52 percent) active. Yet, 38 percent, a significant number of Americans, said they planned to work longer due to concerns about health insurance.

Boomers in particular are wondering how skyrocketing health care costs will impact their future plans as they near retirement. Other cost of living expenses aside, recent research from Employee Benefits Research Institute showed that individuals age 55 who live to age 90 would need to have accumulated $210,000 (by age 65) or have sufficient retirement income to pay for insurance to supplement Medicare and out-of-pocket medical expenses in retirement. Boomers are realizing that things are different today and that their financial lives are more complicated. Accounting for health care expenses will certainly impact the many goals they have for their retirement years, which may include starting a new career or business, cycling between periods of work and leisure, and pursuing other life goals.

If you’re a boomer looking for ways to conserve your retirement savings, there are some steps you can take now to prepare for costly health care expenses later.

Understand Your Company’s Retirement and Health Benefits
One of your first considerations as it relates to covering your health care expense in retirement is to carefully understand what expenses, if any, your employer (or perhaps your spouse’s employer) may cover. Seventy one percent of the individuals surveyed in the 2006 Merrill Lynch Study: A Perspective From Individuals And Employers, cited health insurance coverage as a major consideration in their work plans. If you expect to work in some capacity during the early stages of retirement, be sure to consider what health insurance benefits that may provide.

In the employer portion of the study, concerns over the increasing cost of benefit programs ranks as the most pressing human resource issue that employers are facing. However, employers are also recognizing the potential impact of the large number of baby boomers retiring from the work force. Because employers will want to retain key employees, particularly highly skilled professionals, many are thinking about new approaches on how to structure their health insurance plans or accommodate the new retirement lifestyle of baby boomers. The result, for many of these employers, may be a solution where employers will make many health insurance plans available to parttime and seasonal “retired” workers, but with the worker paying most or all of the cost. While coverage may still be expensive, this may provide access to individuals at group rates that would be hard to obtain elsewhere.

Prepare for Long-Term Care Needs

A fear shared by many Americans is that their hardearned savings will be used up while trying to pay for longterm health care. Many people buy a long-term-care insurance policy because they want to have funds available for their own care and do not want to deplete their assets and burden their spouse or children with nursing-home bills. Long-term care insurance can help provide coverage for care in a nursing home, in your own home, at assisted-living facilities or adult day care centers as well as help provide coverage should you later experience a prolonged physical illness or disability. This type of insurance is purchased for the same reason people buy auto insurance, homeowner’s insurance and health insurance – to help protect themselves and their assets. To determine if you should obtain long-term care insurance, consult with your Financial Advisor.

Plan Beyond Entitlements

While Medicare is available for those ages 65 and over, there has been much press about future Medicare shortfalls. Preparing for your retirement should also include a scenario that does not rely solely on entitlements.

Work with a Financial Advisor to help map out a strategy that will support you at your desired lifestyle regardless of potential future changes in entitlements. You should also make sure that your savings plans include setting aside sufficient savings or income to cover health care costs. Maximizing your employer’s retirement plans is the first place to start, but don’t overlook IRAs.

If you and your spouse are both over the age of 50, you can contribute a combined $10,000 ($5,000 in each IRA) in 2007. These contribution limits may increase in 2009 and later years. Depending on whether or not you or your spouse participate in an employer sponsored retirement plan, your tax filing status and your modified adjusted gross income, you may be able to take a current income tax deduction on your IRA contribution. Even if you can’t, your contribution will still enjoy tax-deferred growth potential. If your employer offers a high-deductible health insurance option, explore saving in a health savings account (HSA). Not only do HSAs provide tax advantages, but saving for health care costs in a separate account will help you closely track how much you have accumulated toward this critical need in retirement.

Health care costs are often an inevitable and growing expense for retirees. By anticipating and including these costs in your retirement plan, you can adjust your savings to cover these expenses and accommodate to your retirement lifestyle.

Consider Every Piece of Your Financial Life

Your retirement goals may need to be considered in the context of other goals, like preparing for college tuitions, charitable contributions and estate planning services. Consider all of your retirement resources, including regular sources of income such as Social Security, pensions, annuities, and assets. To make the retirement you envision a reality, it’s important to consider every piece of your financial life. Work with a professional advisor who not only helps guide you with your financial life, but one who understands your retirement and other goals in order to bring financial strategies that can help you meet those goals.

Michael Falcon is Managing Director of the Retirement Group at Merrill Lynch.

This material was prepared to support the promotion and marketing of Merrill Lynch products. Merrill Lynch, its distributors and their respective representatives do not provide tax, accounting or legal advice. Any tax statements contained herein were not intended or written to be used, and cannot be used for the purpose of avoiding U.S. federal, state or local tax penalties. Please consult your own independent advisor as to any tax, accounting or legal statements made herein.

The 2006 Merrill Lynch New Retirement Study was produced with the help of Harris Interactive┬« in an effort to better understand the retirement expectations and preparedness of both individuals and employers. By building on the findings of the 2005 New Retirement this new study allows us to recognize the New Retirement realities and expectations of a broad segment of the population and American Corporations. The results of this major research effort are an important step in Merrill Lynch’s ongoing, long-term commitment to their individual and institutional clients. For more information on this survey, please visit totalmerrill.com/retirement.