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Powell: Taming retiree health care

Robert Powell
Special for USA TODAY

Good news: Recurring, predictable out-of-pocket health care expenses remain somewhat stable over the course of retirement.

The bad news: Non-recurring unpredictable expenses — such as surgery, hospitalizations, and nursing home care — increase with age, tend to be more expensive, and, in the absence of a plan to manage those costs, can wreak havoc on a household's finances, according to research just published by the Employee Benefit Research Institute (EBRI), a nonpartisan research institute based in Washington, D.C.

"Health care is one of the key components of retirement expenses, and is the only part of household expenditures that increases with age," Sudipto Banerjee, a research associate at EBRI and author of the report, said in a release. "While some of these costs are more predictable, others are uncertain, and for many people these expenses spike toward the end of life when resources are slim. To successfully manage your resources in retirement, a good plan may include separate preparations for each."

In its research, EBRI found that average, annual out-of-pocket health care costs for a household between 65-74 years old was $4,383 in 2011, which accounted for 11% of total household expenses. But out-of-pocket health care expenses rise for households ages 85 and above to $6,603 a year, or 19% of total household expenses.

On the go? Listen to Robert Powell's interview with Sudipto Banerjee in the audio player below:

The average annual expenditure for recurring health care expenses — doctor visits, dentist visits and usage of prescription drugs — among the Medicare eligible population was $1,885. According to EBRI, assuming a 2% rate of inflation and 3% rate of return, a person with a life expectancy of 90 would need $40,798 at age 65 to fund his or her recurring health care expenses. This does not include expenses for any insurance premiums or over-the-counter medications, EBRI noted.

Robert Powell

But it's the non-recurring and unexpected health-care costs — overnight hospital stays, overnight nursing-home stays, outpatient surgery, home health care and usage of special facilities — that must be managed.

Nursing-home stays, for instance, can be very expensive, according to EBRI. For people ages 85 and above, the average and the 90th percentile of nursing-home expenses were $24,185 and $66,600 during a two-year period, respectively.

Other key findings:

• Nursing-home stays, home health care and overnight hospital stays are much higher in the period preceding death. More than 50% in every age group above 65 received in-home health care from a medically trained person before death. For those 85 and above, 62.3% had overnight nursing-home stays before death and 51.6% were living in a nursing home prior to death.

• Women above 85 have significantly higher nursing-home usage than men, according to EBRI.

• The top income quartile spent significantly more on nursing-home and home health care expenses than the rest. Usage of recurring health care services generally goes up with income. Usage of non-recurring health care services — except usage of outpatient surgery and special facilities — goes down with income.

Read:Utilization patterns and out-of-pocket expenses for different health care services among American retirees

By way of background, EBRI noted in a different report that a man would need $64,000 in savings and a woman would need $83,000 if each had a goal of having a 50% chance of having enough money saved to cover health care expenses (recurring and non-recurring) in retirement in 2014.

So what's the best way to plan for such expenses?

Put retirement expenses in perspective. Health care is just one of many expenses individuals incur during retirement, says David Blanchett, the head of retirement research at Morningstar Investment Management in Chicago.

"While health care costs are definitely a real fear among retirees and receive a significant attention from the media, medical costs are only one of the many different types of expenses incurred by retirees in retirement," Blanchett says.

For example, in the Consumer Price Index there are eight major groups, including food, housing, apparel, transportation, medical care and the like. "So, while I think it's important to think about medical costs, I think it's important to put them within the context of total spending," says Blanchett.

Separate health care expenses into two categories. According to Banerjee, some health care expenses are predictable, occur regularly and the amount is stable throughout retirement. In the extreme, recurring and predictable health care expenses equal 19% of total expenses, according to the EBRI study.

"So, when people are making a budget for essential expenses in retirement, that budget should include the recurring expenses," Banerjee says. "Probably, it is a good idea to have a steady stream of guaranteed income such as Social Security, pensions, and additional annuities to cover those essential recurring expenses."

In addition, he says buying the appropriate Medicare Part D prescription drug plan and an appropriate Medicare Supplement Insurance (Medigap) policy, the latter of which helps pay some of the health care costs that Original Medicare doesn't cover, could go a long way toward mitigating recurring and expected health care costs.

Purchase long-term care insurance. As for the non-recurring health care expenses, Banerjee says it is pretty difficult to plan ahead. "A lot will depend on individual and family health histories, and people will have to fall back on their savings" he says.

Still, he says it's worth buying long-term care insurance for these expenses. "A stay in a long-term care facility can be very expensive as the results show," Banerjee says. "So, a long-term care insurance can be very helpful for lot of seniors."

Others agree. "As the (EBRI) study notes the recurring costs are relatively consistent, but there is the potential for "shocks' like a nursing home stay," says Blanchett. "If an individual enters a nursing home it is likely other costs will decrease, though it's unlikely they will totally offset. This where a long-term care policy or using the home as a 'means of last resort' can be an effective plan."

Earmark savings for unexpected health care costs. Blanchett also recommends, if possible, earmarking additional savings for unexpected health care costs.

"All things considered, it's very difficult to plan for long-term care costs because the probability of needing care and the average cost per stay increases as someone ages," says Blanchett. "In theory, this where insurance is ideal, but long-term care insurance is relatively expensive and not necessarily available to all households."

So, another option is to set aside a portfolio that will either be used to pass money to heirs or to potentially fund medical expenses.

In reality, Blanchett says this isn't going to be viable for most households since most people are underfunded for retirement. Still, it's an option for those who have the means.

Other resources:

-Health care costs in retirement guide

-How to tame retiree health care costs

-AARP health care costs calculator

-Health care coverage for retirees

Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch and teaches at Boston University.

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