Portfolio gyrations not enough for you? Ready for more risk?
Along with rising health-care costs, workers need to plan for higher risks associated with financing their care in retirement, say experts who are studying trends covering a range of employees.
Just as companies cap their retirement-plan exposure with defined contributions instead of guaranteed benefits, they are limiting their outlay for health care.
That means added costs for retirees, and it also pushes a future liability risk onto their retirement-planning balance sheets that needs to be addressed, experts advise.
How big of a risk? Some financial planners are urging all but their wealthiest clients to wait to retire until at least 65, when they qualify for Medicare coverage.
"Clients don't want to hear it, but health care is a huge issue to plan around," said Sheryl Garrett, a financial planner and author of "Personal Finance Workbook for Dummies."
"It's probably one of the hardest things we do, because so much of it is uncontrollable," said Pamela Lee, a planner and owner of Pursestrings Financial in San Francisco.
"The reality is, no one feels they can afford to set aside a large amount of money for the great unknown."
Almost no one is immune.
More employers are cutting out health-care benefits for future retirees. Even retirees who have benefits may be facing more risk: U.S. automakers are offloading their retiree health-care liability by funding special trusts managed by the United Auto Workers union.
Investment gains and workers' own cost containment will determine whether money will be there to meet retirees' needs.
Telephone and utility workers could be the next wave of these arrangements, known as voluntary employees' beneficiary associations, said Dave Osterndorf, chief health-care actuary for Towers Perrin in Milwaukee.
More of the trusts also could pop up among teachers and municipal workers as waves of retirees stress governments' ability to meet health-care obligations.
The structures have at least one advantage over the traditional model: overseers free from worrying about quarterly share prices, whose only mission is maximizing the long-term financial health of the funds, said Stuart Wohl, a Washington, D.C.-based retiree-health-care practice leader for The Segal Co.
Meanwhile, professionals and other unrepresented workers often go it alone for retiree health care.
"The trend here is that the percentage of employers offering retiree care is going down, and, unlike in the pension area, there haven't been the same policy initiatives to try to fund this," said J.D. Piro, principal of Hewitt Associates' health-law consulting group.
Among employers with 1,000 or more workers, 59 percent offer coverage to pre-65 retirees, down from 72 percent in 2002, according to Hewitt. But coverage drops off dramatically in smaller workplaces.
Nearly a third of employers have a "defined dollar'' formula limiting employer costs for pre- and post-65 retirees, Hewitt said.
To get your arms around your own unfunded liability, experts said to focus on what you can control most: learn which Medicare and insurance choices best fit your needs, take better care of your health and factor retiree benefits into every job search.
What will it cost? Both the Employee Benefit Research Institute and Fidelity Investments have researched retiree health costs. EBRI pegs the lifetime cost at $295,000 for a couple age 65 today, while Fidelity clocks in at $215,000.
The EBRI figure assumes premium payments for insurance coverage beyond Medicare and out-of-pocket expenses. The Fidelity number assumes no other coverage and includes co-pays, excluded benefits and prescription costs, among other items.
The numbers go higher if you beat your life expectancy or use higher-than-average services.
Financial planners say they are seeing retired clients spending $850 to $1,000 a month on Medicare premiums, co-pays and out-of-pocket expenses. So you might plan to build $1,000 a month into your spending projections to see how that alters your retirement date.
And when deciding on Medicare options, don't overlook Medicare Advantage Plans, which offer services through private insurers, said Tom Paul, president of UnitedHealth Group Alliances in Minnetonka, Minn.
The plans can offer lower premiums, but they vary significantly by region and can have higher out-of-pocket costs for services, he said.
You also can shop for employers offering retiree health, or for second careers that cover part-time workers. But have a backup plan if it falls through.
Garrett's book offers some worksheets on tallying health costs, with some numbers on Medicare already plugged in. Don't forget to customize your own numbers, though, as they change according to income.
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