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The Other Retirement Planning Crisis

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: The cost of covering health care expenses in retirement will hit boomers hard

By Allison Bell

Too many boomers who dream of traveling or working on their hobbies when they retire could end up struggling to pay for second-rate health care.

Saving to cover retirement living expenses is tough enough. But Karin Landry, managing partner at Spring Consulting L.L.C., Boston, says advisors had better be warning the conscientious boomer clients who are preparing for the future about another risk: the risk that the cost of health care, Medicare supplement insurance and the Medicare Part B physicians services insurance program will continue to go up.

The Employee Benefit Research Institute, Washington, has estimated that a typical boomer probably will need at least $297,000 in retirement health savings just to cover the cost of Medicare premiums, Medicare supplement premiums and routine out-of-pocket medical expenses through age 90.

That projection assumes an annual health inflation rate of only 3%. The projection that includes a 10% annual inflation rate shows that a typical boomer might need about $1.4 million in savings simply to cover basic retirement medical and retirement health insurance expenses.

Landry, who helps insurers and some large employers design and manage benefit plans, says she and her colleagues rarely lie awake at night worrying about the terrible plight that will face boomers who fail to set aside separate cash for retirement health expenses.

Thats what we do during the day, Landry says.

If the United States muddles along without enacting major new retirement health savings programs or tax incentives, retired boomers will have to have health care one way or another, Landry says.

But lack of retirement health savings might create a world where as many as 80% of elderly boomers will have to continue working past the official retirement age, Landry says.

Elderly boomers who must compete with other elderly boomers for the bare-bones package of care that the government offers poor retirees could end up dying a year or two earlier than retirees who can afford a better level of care, Landry says.

So, what help can advisors offer today?

Advisors should, of course, recommend that boomer clients use 401(k) plans, individual retirement arrangements, and annuity contracts and life insurance policies to maximize general retirement savings.

Clients who happen to be owners of companies that sponsor defined benefit pension plans can fund their own retirement health costs and other workers retirement health costs by contributing to 401(h) plans.

Boomer business owners also could consider setting up health reimbursement account programs or health savings account programs for their companies.

Employers can use tax-deductible contributions to HRAs to cover the cost of current and future medical expenses, including retirement health expenses, for themselves and their employees.

One major insurer, Aetna Inc., Hartford, recently announced a program to help employers finance retiree health benefits by using HRAs to set up retiree reimbursement accounts.

But Aetna is aiming its reimbursement account program at employers that want to shift away from traditional, employer-paid retiree health programs, not at boomer business owners who want to cover the cost of their own retirement health expenses.

Some boomer business owners might be affluent enough to prefund their own retirement health expenses but not affluent enough or generous enough to do the same for their employees.

Boomer business owners may be able to get similar results for themselves while reducing the burden of funding employee benefits by setting up HSA programs. The tax code lets employers share all or part of the funding costs with employees.

Affluent boomers who are self-employed or get no health coverage or high-deductible coverage from their employers also can set up HSAs.

But the tax code puts strict limits on HSA contributions, and affluent boomers who still have access to traditional, rich coverage probably are better off with traditional coverage than with HSAs, experts say.

The National Association of Retired Federal Employees, Alexandria, Va., has argued in letters opposing efforts to offer an HSA option to federal employees that giving employees a choice between HSAs and traditional coverage will undermine traditional health insurance plans by taking away the healthiest employees and leaving them with the employees with the highest claims costs.

Employers who want to share retirement health plan funding costs with employees might find that employees are wary of the accounts or feel that they are unable to afford account contributions.

The University of Minnesota faculty senate, for example, has been trying to set up a post-retirement health care savings plan that would have a basic contribution equal to about 1.5% of a faculty members salary. So far, though, advocates of the plan have been unable to get the faculty senate to adopt it, according to reports on the faculty senates Web site.

Fidelity Investments, Boston, has tried to drum up support for a new retirement health savings vehicle, the retirement medical benefit account (RMBA), that would let employees direct a portion of 401(k) plan contributions to a special health care expense account.

The government would exempt RMBA contributions from income taxes, and it would exempt RMBA distributions used to pay for qualified medical expenses from income taxes. That would make the RMBA more effective at paying for retirement health expenses than ordinary retirement plans, Fidelity says.

Economists at the Center on Budget and Policy Priorities, a Washington think tank, argue that the RMBA proposal would reduce sorely needed tax revenue without doing much to help the low-income and moderate-income workers who most need government help with covering retirement health costs.

Reproduced from National Underwriter Edition, June 25, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.