How to Save $100,000 or More in Retirement

Last Updated Apr 6, 2011 10:44 AM EDT

Fidelity Investments recently released its annual estimate of the lifetime, out-of-pocket costs for medical bills for a couple, both age 65, retiring in 2011. This year's number -- $230,000 -- is down $20,000 from 2010's estimate of $250,000. While a lot of attention is being paid to this unexpected drop, the Fidelity researchers were careful to portray this reduction as a one-time event, and said they expect medical costs to resume increasing in the future. Fidelity attributed the one-time reduction to last year's passage of the health care reform act, which will partially close Medicare's hated "donut hole" for prescription drugs.

In its news release announcing its findings, Fidelity encouraged individuals to save for future medical expenses with a Health Savings Account (HSA). The release notes that in 2010 HSA account holders contributed an average of $2,630 to their accounts; 95 percent of these people carried some part of these balances forward to future years.

I agree that contributing to an HSA is a good idea, and I encourage you to invest as much as you can in an HSA. But there's a big problem if that's the only thing you do to manage your medical costs in retirement: There's no way you could accumulate $230,000 in an HSA if you're currently in your 50s or 60s.

So what else can you do? Before I offer my suggestions, let's take a look at a breakdown of that $230,000:

  • 31 percent, or $71,300, will be needed for Medicare Part B and D premiums. You can't avoid this cost.
  • 24 percent, or $55,200, will be needed for out-of-pocket costs for prescription drugs.
  • 45 percent, or $103,500, will be needed for co-payments, co-insurance, deductibles, and other out-of-pocket medical expenses.
These last two items total $158,700, and you only incur them when you need medical services -- in other words, when you get sick. This quantifies the potential savings you might realize if you maintain a healthy lifestyle, which it doesn't take a rocket scientist to understand. You can substantially reduce the odds of incurring high medical bills through exercise, proper nutrition, stress management, limiting your alcohol intake, not smoking, and getting enough sleep.

Now don't get me wrong: I expect you'll need some medical services over your lifetime, even if you do everything right. So I'm using $100,000 as the potential lifetime savings if you're very serious about maintaining a healthy lifestyle. This still leaves $58,700 that you and your spouse may need to spend on medical costs over your lifetime.

Here are a few more details about Fidelity's projected lifetime medical costs:

  • The total includes Medicare premiums for Parts B and D, co-payments and deductibles for Medicare Parts A, B, and D, and out-of-pocket costs for hospital and medical services and prescription drugs.
  • It assumes you aren't covered by employer-sponsored retiree medical insurance. If you're lucky enough to have this coverage, your numbers could be lower.
  • It doesn't cover over-the-counter drugs, dental costs or long-term care costs, so the actual numbers to keep you healthy could be a lot higher.
I hope these numbers inspire you to take steps to improve your health, and you stick to those good habits through your retirement years. Not only might you save boatloads of money, you'll look and feel better now.

P.S. Note that if Rep. Paul Ryan has his way with Medicare, your out-of-pocket medical expenses will increase in future years!

Image from iStockphoto contributor kcline
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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.