Ice floe anyone? A 65-year-old couple retiring today will need on average a tidy $200,000 set aside to pay for medical costs in retirement, according to an annual Fidelity Investment study released this week.

Of course, as with any study, the devil is in the details. For instance, Fidelity's estimate, which assumes that Americans do not have employer-sponsored retiree health care, includes expenses associated with Medicare Part B and D premiums ($64,000), Medicare cost-sharing provisions such as co-payments, coinsurance, deductibles and excluded benefits ($72,000), and prescription drug out-of-pocket costs ($64,000). Fidelity's numbers do not include other health expenses, such as over-the-counter medications, most dental services and long-term care.

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"It doesn't look hopeful," said Paul Fronstin, a senior research associate with the Employee Benefit Research Institute in Washington, D.C. and fellow at TIAA-CREF Institute whose research shows medical costs in retirement to be even higher. "It's a massive problem especially in light of what happens to Medicare over the next 14 years."

To be sure, not all retirees will need as much as Fidelity's or Fronstin's research suggests. For instance, some retirees, though fewer and fewer, will have retiree health care coverage from their former employer. Others, however, especially those who may need to use a nursing home or who live past age 85, (which is the life expectancy Fidelity used to calculate the present value of medical care costs), may need even more than $200,000 set aside.

But no matter whether you need more or less than $200,000, Fronstin and others say the fact remains that retirees will need lots of money to pay for medical costs in retirement.

So what are some of the best ways retirees can pay for or reduce the cost of health care in retirement?

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Keep working, especially for a company that provides health care. For many preretirees and retirees, the hard reality is this: Many will have to keep working out of need. Either they didn't save enough to pay for health care expenses so they need the income to pay for such costs. Or they need to work for a company that provides health care coverage.

Either way, Fronstin sees this as the best option for many Americans who failed to pay for health care costs in retirement. The next best bet, especially for those who cannot work during retirement, is to be married to a spouse who can work for a firm that provides health care insurance or at least pays well enough to pay for such costs.

For his part, Fronstin suggests that some Americans consider working for the U.S. Government for at least five years, especially in light of Uncle Sam's rich retiree health care plan. Read Fronstin's reports at EBRI's Web site and TIAA-CREF Institute's Web site.

Maintain a healthy lifestyle. Steve Vernon, author of "Live Long & Prosper" and vice president for Watson Wyatt Worldwide, says the best way to pay for medical costs in retirement is maintain or adopt a healthy lifestyle now. "A lifetime of bad habits will result in higher medical costs," says Vernon. In fact, Vernon estimates that preretirees and retirees can reduce the odds of having high medical costs in retirement, and especially those associated with long-term care such as nursing homes, by 75% simply by eating right, exercising, and reducing stress.

Use a health savings account (HSA). Fidelity Investments suggests that pre-retirees might consider using an HSA, a tax-advantaged account, to pay for future medical and retiree health care expenses.

To be sure, Americans under age 65 who participate in high-deductible health plan get plenty of tax savings with an HSA. They can deduct the amount they contribute to an HSA, their money grows tax-deferred and they can withdraw money from an HSA tax-free if used for qualified medical expenses.

The big problem, however, say Fronstin and Vernon is that few Americans have access to an HSA today. Preretirees, for instance, must work for a firm that provides a high-deductible health plan. Plus, the amount of money that people can set aside in such accounts (a current maximum of $5,450) will unlikely grow enough to pay for medical expenses in any significant way. "HSAs are great in the sense that the provide tax advantages that you can't get anywhere else but its savings potential isn't great," Fronstin says. Still, Vernon says those who access to an HSA should save as much as they can in it. Learn more about HSAs at the Treasury Department's Web site.

Consider buying long-term care insurance or a catastrophic health insurance plan. Fidelity's estimate of health care expenses in retirement doesn't include the costs associated with long-term care, such as home-health aide (presently about $19 an hour), assisted living facilities (presently about $35,000 per year), or nursing homes (presently about $74,000 per year). And that means pre-retirees and retirees need a just-in-case plan to cover those costs.

Vernon says preretirees and retirees who don't maintain a healthy lifestyle might consider buying long-term care insurance, especially if they have access to group plan. But in the main, he says people, especially those with a healthy lifestyle, are better off setting aside the money they might have used to pay for long-term insurance in savings as well as toward a catastrophic health insurance plan. "Most of diseases and illnesses associated with long-term care are due to lifestyle decisions," he says.

Fronstin says preretirees should buy long-term insurance way when they younger rather than older. That's especially important since many older applicants get turned down because of some health issue or another, he says. Of course, the big issue with long-term care insurance, he says, is this: "You are trying to buy something that you may or may not need for 20 years and hope that you don't need."

Buy a medigap insurance plan or enroll in a Medicare Advantage. A medigap insurance plan will cover the costs not covered by Medicare Part A, B and D. Yes, experts say these policies may not reduce the $200,000 Fidelity estimates that a 65-year-old couple needs in retirement. But a medigap insurance plan, in combination with Medicare Part B and Part D insurance, or Medicare Advantage plan reduce the likelihood that you need more than $200,000 for health care expenses. Learn more about those plans at Medicare's Web site.

Save more now. Sure, it's trite. But Fronstin says preretirees, especially younger employees, could save a lot more now in anticipation of health care expenses in retirement. "This is where the big opportunity is," he says, noting the small percentage of workers who save the maximum in their 401(k) plans or even save enough to take full advantage of their company's match. "And the earlier you start the better."

Robert Powell is editor of Retirement Weekly — a service of MarketWatch, author "20 Tips for Retirement Investors," and co-author of "Decoding Wall Street." He is also developing two personal finance series for public television.


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