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BOSTON (MarketWatch) -- 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.

"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?

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 because 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 play 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.