Will medical bills ruin retirement?

By Liz Pulliam Weston

I'm usually a glass-half-full kind of person, and I found reason for optimism in the National Retirement Risk Index's predictions that not all of us are doomed for a financially impoverished retirement.

The index, developed for the Center for Retirement Research at Boston College a couple of years ago, attempts to predict the percentage of households that won't be able to maintain their standards of living in retirement. The latest result: 44% of U.S. households are likely to fall short. (You can learn more about the index and how it's calculated here.)

The percentage predicted to fail is high, yes, but that still leaves a majority of households OK -- except that the index doesn't explicitly consider health-care costs.

Staggering out-of-pocket costs

That seemed like a pretty big omission to Alicia Munnell, the center's director. So she and other researchers decided to include out-of-pocket medical costs including Medicare premiums and co-pays, which currently average about $3,800 a year.

The sums required to pay those costs are, in a word, staggering. After adjusting the expenses for predicted inflation, the researchers said a couple retiring in two years would need more than $200,000 to cover their lifetime out-of-pocket medical costs. A couple retiring in 2040 would need close to $500,000.

What a 65-year-old retiree will need for future out-of-pocket health-care expenses:

Retirement year	Born	Single	Couple
2010	1945	$102,966	$205,932
2020	1955	$141,752	$283,503
2030	1965	$188,899	$377,798
2040	1975	$245,767	$491,534

Source: Center for Retirement Research

Once those sums are factored into the retirement index, the glass suddenly empties. A whopping 61% of us are now at risk of being unable to maintain our standards of living in retirement.

Oh, but it gets worse. The younger you are and the less you earn, the more likely you are to suffer a decline in your standard of living because of medical costs.

Percentage of U.S. households at risk of being unable to maintain their standards of living in retirement when health-care costs are considered:

Income group	Born 1946-74	Early boomers (born 1946-54)	Later boomers (born 1955-64)	Generation X (born 1965-74)
All	61%	50%	61%	68%
Top third	53%	48%	52%	59%
Middle third	57%	44%	57%	67%
Low third	72%	58%	74%	80%

Source: Center for Retirement Research

The higher rates of failure for later retirees largely reflect the steady rise of health-care costs, which the researchers predict will continue to outpace inflation by 3 percentage points. And folks lower on the earning scale have less room to trim the "extras" to pay for medical costs, which means their basic standards of living are more likely to take hits.

• Video: Jubak on the retirement crisis

Ready for the killing blow? These figures don't include the costs of long-term care. That's the kind of custodial care you get in a nursing home or from an in-home aide when you can't perform basic functions like dressing, bathing or feeding yourself. Long-term care is:

• Widely needed. The center estimates two-thirds of people over 65 will need long-term care at some point in their lives, and 40% will require such care for two years or more.

• Expensive. The average rate for nursing-home care is $213 a day, or nearly $80,000 a year. In-home aides average $19 an hour -- $152 for a daily eight-hour shift, $456 a day for round-the-clock care.

Medical expenses wipe out a lot of folks in retirement. One-quarter of the elderly people surveyed in one study reported in the May 2003 Journal of Gerontology were on track to use up their entire life savings within five years because of medical expenses.

Continued: Time to take action

 1 | 2 | next >