By Mark Miller
CHICAGO (Reuters) - We've all heard the scary numbers. Experts say Americans need to set aside hundreds of thousands of dollars to pay for health care in retirement -- $200,000, $300,000 or more. Billions and billions, as the late astronomer Carl Sagan would have said.
But these forecasts are just average figures; it is harder to get a handle on what your own health care spending will really be in retirement. And with so many struggling to save anything at all, what's the point of trying to plan specifically for health care?
A new study points to the gap between expert forecasts and consumer understanding of the issue. The researchers - law professors at the University of California, Los Angeles, and Harvard University - asked over 1,000 Americans, age 40 to 80, what they expect to spend on health care in retirement and compared their answers to forecast data from the Urban Institute and the Employee Benefit Research Institute (EBRI).
The EBRI lifetime cost forecast for out-of-pocket healthcare spending by women retiring in 2020 at age 65 was a median of $156,000, rising to $357,000 on the high end. Yet women surveyed said they'd spend a median of just $30,000. Men thought they'd spend $60,000; slightly more than half the EBRI-projected median for men of $109,000.
The respondents didn't seem to understand the factors that can make pinpointing health costs so difficult: medical cost inflation, the possibility of policy changes affecting Medicare, and the unpredictability of health itself. While they may have known some of the costs - Medicare premiums, for example - they tended to underestimate the importance of their own health in determining future spending.
"Even if someone got the median numbers right, they may not understand that they might not be at that number," said Allison Hoffman, an assistant professor at the UCLA School of Law who specializes in health-care law and policy, and co-author of the report. "Some people will need less care, some will need more. And, depending on their own situation in retirement, the numbers could be double or half the number."
So that's the challenge we all face in planning for health care in retirement: coping with uncertainty and controlling what we can control.
Medicare will cover about half your health-care costs in retirement, with the rest paid out of pocket. Among the expenses the typical retiree will have to cover are premiums for Medicare Part B (outpatient services), Medicare Part D (prescription drugs), and a Medigap supplemental policy, which usually covers co-pays and puts a ceiling on out-of-pocket costs in the event of a catastrophic health problem.
There is no charge for the hospitalization coverage provided by Medicare Part A. Future retirees also should count on spending money for dental care, vision care, co-pays and long-term care, if that's needed.
To plan for your own healthcare spending, consider these key variables:
- Longevity. Your current age, expected year of retirement and gender all are factors that can help predict the total number of years of healthcare you'll need to fund.
- Major health conditions. If you're less healthy you'll spend more annually - but you may not live as long.
- Location. Medicare B and D premiums don't vary nationally, but Medigap premiums are set and regulated at the state level and vary substantially. For example, Medigap policies in low-cost Hawaii come in at an average of $4,400 less per year than a comparable plan in Illinois.
- Income in retirement. High-income seniors pay stiff Part B and Part D premium surcharges. The surcharges affect single filers with more than $85,000 in annual income and joint tax filers with income over $170,000. Currently, the high-income surcharges affect just 5 percent of seniors, but that is on track to hit 14 percent by 2019 under the Affordable Care Act.
"Every case is different," says Ron Mastrogiovanni, CEO of HealthView Services, which develops financial planning software for financial advisers focused on health care. Mastrogiovanni's software takes into account all the variables - and it illustrates ways to pay for projected health-care expenses using income from Social Security, pensions and savings (you can test drive a light edition of the software yourself for free here: http://apps.hvsfinancial.com/hvadvisor/ ).
He ran some hypothetical scenarios for a 55-year-old woman - let's call her Gail - who plans to retire at age 67. Her lifetime cost projections varied by hundreds of thousands of dollars. If Gail is healthy, has income below the high-income surcharge trigger, and lives to age 89, she can expect to spend $224,000 on healthcare in her retirement lifetime.
Remember, all these numbers are expressed in future dollars, so medical inflation is a big variable driving the figures. Mastrogiovanni's software assumes health-care prices will rise about 7 percent a year - a number that may or may not come to pass.
Looking at this in today's dollars, if Gail is able to devote 15 percent of her future Social Security checks to fund health care, she would need to have $60,000 in the bank today available for future health care needs - or save $6,800 per year between now and retirement at 67, Mastrogiovanni says.
What does this mean in the broader context of retirement planning and saving? If you're following the old rule of thumb that you'll need to replace 80 percent of pre-retirement income in retirement, health care can be considered part of that total, Mastrogiovanni says.
But since health care is a key non-discretionary expense - and one you can't really control - you might need to adjust other areas of spending if you end up having higher-than-expected healthcare costs.
After all, the key is looking for ways to turn those billions and billions into something more manageable.
Follow us @ReutersMoney or at http://www.reuters.com/finance/personal-finance
(The writer is a Reuters columnist. The opinions expressed are his own. For more from Mark Miller, see http://link.reuters.com/qyk97s)
(Editing by Linda Stern and Leslie Adler)