Retirement Keeps Getting More Expensive

A 65-year-old couple retiring this year will need approximately $225,000 – just  to cover medical costs, assuming they don't have an employer-sponsored retiree health plan. That's the latest health care cost estimate from Fidelity Investments, which has been calculating this cost since 2002. Over the last six years, Fidelity reports that it has risen 41%, with an average annual increase of 5.8%. Since last year, the increase is "only" 4.7% higher than 2007's estimate.

In coming up with its estimate, Fidelity assumes that seniors will have to pick up the cost of Medicare Part B (doctor and outpatient) and D (prescription drug) premiums, as well as any co-payments, deductibles, and out-of-pocket expenses. Not included in that $225,000 health care nest egg are the cost of over-the-counter medications, most dental services, or long-term care. In other words, it could cost us even more than that. Ugh!

How Much Will You Need?
I thought it might help to see how much you'd need to save a month to come up with a $225,000 nest egg by the time you're 65. I'm assuming that your money will earn 7.5% (10.5% interest - 3% for inflation).

If You Are	Years to Retirement	Monthly Investment
25	40	$77
35	30	$167
45	20	$406
55	10	$1,265

Ways to Save

Fidelity, which is the largest mutual fund company in the US, has five suggestions for how to save the money you'll need:

1. Create an individual retirement plan. Whether you take advantage of a plan at work or open an IRA, the tax advantages can't be beat.

2. Start early and maximize opportunities to save. Fidelity points to Health Savings Accounts (HSAs), where people  enrolled in a high-deductible health plan can set aside income, tax-free, to pay for qualified medical expenses now – or to accumulate and be used to pay for qualified medical expenses in retirement.

3. Assess health status and become a smarter consumer of health care. Knowing where you stand health-wise can help you plan. To reduce health care costs now and in the future, Fidelity recommends you consider generic drugs instead of brand names, become better informed about your medical conditions, and focus on prevention.

4. Determine details of any employer-sponsored coverage. Can you count on health care coverage in retirement?

5. Understand the financial impact of health care costs on Social Security income. If you don't have other resources, about half your Social Security benefits might go to cover health care costs.

Those are all good ideas, and I highly recommend them. It also pays to think of ways to save on everyday expenses. Here's a sampling of my favorite painless penny pinching tips and tactics.

• Brew your own. Avoid the pricey designer java.
• Brown bag it.  It should be easy to save $25 a week if you do.
• Really stock up when your favorite products are on sale.
• Get a water filter if you're spending a fortune on "designer water."
• Barter and bargain to get better prices.
• Ask! For example, see if you can get the interest rate lowered on your credit card.
• Comparison shop for all major purchases and expenses, like insurance.

What are your favorite money-saving ideas? Share your tips with us, please!   

Nancy Castleman – Co-author of "Invest in Yourself: Six Secrets to a Rich Life" and founder of Good Advice Press. Nancy has spent the last 23 years teaching people how to get out of debt, save money, and live better on less. She writes on all these subjects for CreditBloggers.com.

Comments

[Emma]

In regards to the 5 ways to save you've listed, I agree with #1 and #2. Although, I wouldn't use a standard IRA, I'd opt for the Roth. Tax-free as opposed to tax-deferred is always optimal. Especially when you can't estimate the amount of taxes you'd pay by the time one retires.

I'm also pro-HSA and use one currently. But, if someone has a history of health issues, it would take some time before you can gather up enough savings in the account to cover costs. And, with a high deductible, it doesn't seem like a good alternative for those visiting the doctor's office or requiring prescription medicine frequently. Still, if you have an HSA, savings can add up over time. And some even offer you the chance to roll some funds over to a Roth without any tax implications.

Another thing to consider come retirement is long term care insurance. For a 30-something, it's really not a viable option. But, anyone who is nearing or already 60 years old, it's a must have. Health and medical expenses can dwindle retirement savings in no time.