On Eve of Retirement, Savings for Medical Costs Can Fall Short

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William Seavey, 69, does not fret about paying future medical expenses. He and his wife, Eleanor, are healthy. And  they both have Medicare and Medigap policies, which can help pay many health costs. So they have not put any money aside in a medical savings account.

If they do need cash, said Mr. Seavey, they can sell one of their three homes. Or they can go to Mexico for cheaper medical treatment.

“My folks ended up in nursing homes,” said Mr. Seavey, who is semiretired and runs a bed-and-breakfast in Cambria, Calif. “But I don’t want to spend a lot of money on medical issues when we may not need it.”

Various studies show that people in or nearing retirement have not saved nearly enough for medical expenses, which rise substantially with age. Medicare, by itself, covers only about 60 percent of medical expenses. And  Medigap, which is supposed to pay for what is left, does not cover expenses such as long-term care, in-home nursing or hearing aids.

“Thinking that Medicare covers all costs is a myth,” said Jean Setzfand, senior vice president of programs at AARP. “These medical expenses are big, looming unknowns.” The organization has a medical savings calculatoron its website that can help estimate health care costs in retirement.

Health care costs are projected to rise about 6 percent a year, which should be factored into medical savings. And longer life spans mean that some retirees may outlive their savings.

Fidelity estimates that couples who retire at 65 will spend $245,000 on health care during their retirement. That number assumes, though, that a man will live to be 85 and a woman 87.

Some benefits specialists fear that estimate is too low. The nonprofit, nonpartisan Employee Benefit Research Institute suggests saving $392,000 for health care by age 65 for a 90 percent chance of having enough money to pay for expenses in retirement.

“If you’re saving for medical costs, don’t assume an average,” said Paul Fronstin, director of the health research and education program at the institute. “You’ve got a 99 percent chance of being wrong, because you don’t know how long you will live.” About half the population outlives its savings, he added.

New drugs, which are keeping people alive longer, sometimes including those with chronic illnesses, can be costly and the costs can add up over time.

Meanwhile, many employers have reduced retiree health insurance, said Kevin Boyles, vice president at Ascensus, a retirement and college savings service provider based in Pennsylvania. “It’s rare now,” he said.

However, many employers do offer health savings accounts, which let workers contribute pretax money that grows tax-free over time. These accounts may be opened only with health plans that have a deductible of at least $1,300 a person this year.

Health savings account contributions of up to $3,350 can be made this year.

People 55 and older, however, may add $1,000 to their annual contributions to increase their savings, which specialists advise. The average health savings account balance for people 65 and older is $5,016, according to the institute.

So the sooner people start contributing to their health savings accounts the better, Mr. Boyles said.

“These are the best vehicles for having medical savings later in life,” he said. “But there’s massive misconceptions about them. For example, people think they have to make withdrawals every year, but they don’t.”

Health savings accounts are also “massively underused,” Mr. Boyles added. They can be invested in stocks and bonds, much like individual retirement accounts.

Once retirees turn 65 and enroll in Medicare, though, they can no longer contribute to a health savings account. However, money can still be withdrawn without penalty for medical expenses.

Without these accounts, people end up selling their homes or taking out reverse mortgages to pay for medical expenses, said Nathan Garcia, a certified financial planner at Westbourne Investments in Alexandria, Va.

“The stress of not having enough money in medical savings is passed down in the family,” Mr. Garcia said. “Children end up helping out.”

To fund looming medical expenses, specialists advise keeping three years of income in liquid investments like cash or certificates of deposit. And budgets should be updated yearly to include the rising costs of health care expenses, they say.

For those worried about paying for long-term care, taking out a policy makes sense.

When Meg Doherty’s husband learned that he had early onset Alzheimer’s disease, she began counting on long-term insurance to help pay his medical bills. By the time her husband died about 12 years later at age 67, she figures that his care cost $650,000, and the insurance paid most of it.

Even so, she said, out-of-pocket costs, such as medications and extra nursing care, consumed about $100,000 of the couple’s savings.

“Alzheimer’s is a very costly disease,” said Ms. Doherty, chief executive of the Norwell Visiting Nurse Association and Hospice in Norwell, Mass. “And Medicare does not cover custodial care.”

Ms. Doherty ended up selling one of the couple’s rental homes to raise cash, and she used money from her salary.

“Prepare for the worst and hope for the best,” said Ms. Doherty, 69, who is increasing the portion of her savings that is liquid as she ages. “But you also have to do your homework.”

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