3. How Will I Pay for Health Care and Long-term Care Costs?

1. Your Retirement Vision
2. Estimate Your Retirement Expenses
3. Paying for Health and Long-term Care
4. Your Defined Benefit Pension
5. Social Security Benefits
6. Estimate How Long Your Resources Will Last
7. Drawing Income from Tax-Advantaged Accounts
8. Managing Taxes
9. Manage Your Investments
10. Should You Consult Professionals?

If you retire before you become eligible for Medicare, you’ll have to finance the gap before you can receive Medicare benefits. Failure to plan for health care costs can mean unpleasant surprises and may even mean inability to buy health insurance at an affordable price.

Please note that while this section provides you with an overview and general understanding of Medicare, for detailed information, you should consult www.medicare.gov. Also, some public employees will have employer support for retiree health care costs. Ask your benefits administrator if you will be eligible for these benefits.

Health Care Coverage After Retirement But Before Age 65

Except in rare cases, Medicare coverage cannot begin before age 65. If you plan to retire before that age and won’t be receiving any employer-sponsored retiree health benefits, finding affordable coverage on the individual market can be a challenge.

Fortunately, under the federal COBRA law, you can continue to be covered under your employer’s plan for 18 months after separation from service. This coverage will be at your expense, commonly $800 to $1,000 a month for a couple, plus an administrative charge. Even though you may be eligible for COBRA coverage, it is a good idea to compare other insurance options. If your spouse or partner is still working, you may be able to enroll under his or her plan, usually at an additional costs. Be sure to find out if you can be added at any time or if there are specific enrollment or eligibility waiting periods.

Once your COBRA eligibility period ends and before Medicare benefits begin, comparable individual health insurance may be even more expensive. Affordable coverage from the private market can be difficult to find, especially if you or your spouse have any pre-existing medical conditions.

Health Care Coverage Beginning At Age 65

According to the U.S. Department of Health and Human Services, people who reach age 65 will likely have a 40 percent chance of entering a nursing home, with about 10 percent staying five years or longer.

Once you reach age 65, you will most likely become Medicare eligible. Medicare pays on the average about half of a typical retiree’s health care cost. Remember that eligibility age is individual. If you turn 65 before your spouse, only you will be covered under Medicare. Your spouse will be covered when he or she reaches age 65.

Medicare coverage, of course, is not enough by itself. There are several supplemental plans available, including Medigap insurance and Medicare Advantage Plans. Costs for supplemental coverage vary widely by plan and location. Carefully consider the complicated Medicare Part D prescription drug benefits coverage options too. Further information, including costs and comparisons of plans available in your area, is available at www.medicare.gov.

Although detailed budgeting can help, what is most critical is a thoughtful comparison of today’s major expense categories with costs expected during retirement. Here are some expense categories and how they may change.

Long-Term Care

Long-term care - either help at home or in an assisted living or nursing home care facility - is a reality that you need to consider when planning for your future. Medicare does not provide a long-term care benefit. According to the U.S. Department of Health and Human Services, people who reach age 65 will likely have a 40 percent chance of entering a nursing home, with about 10 percent staying five years or longer.

Long-term care is expensive. In some cases it can be a cost that devastates a family’s finances. The national average cost of a year in a nursing home was more than $70,000 in 2006, according to the CareScout Network, a Boston consulting firm.

If you qualify, you may purchase long-term care insurance from a private insurer. Such insurance can be very expensive, with half of all policies lapsing before benefits are paid, because the premium cost can become burdensome for the insured.

Even if you buy a long-term care insurance policy, a good deal of the cost of nursing home care will very likely be paid out of your own pocket. For example, if a person is in a nursing home that costs the national average of $70,000 per year, the daily cost is $197. A long-term care insurance policy may have a six-month waiting, or "elimination," period before the policy starts to pay benefits and then may pay $125 a day after that. With such coverage, the uninsured cost you must pay for a two-year stay in the nursing home would be more than $83,000.

According to the United Seniors Health Council, you should consider a long-term care policy if:

It costs no more than 7 percent of your retirement income;
You have assets of at least $75,000 per person (excluding home and car);
You have yearly retirement income of more than $35,000 per person; and
You can afford a sudden 30 percent premium increase.