Don't let health care costs hamper your retirement

Today, your health insurance premiums and medical expenses could be eating into a huge part of your retirement savings - and the future doesn't offer much encouragement. Health care costs will probably continue to grow faster than inflation, and a lot of employers are reevaluating if they will be able to continue to offer the same level of retiree health insurance coverage.

In a recent study from Phoenix Marketing International, a U.S.-based marketing research firm, investors with $1 million or more in investable assets said that the rising cost of health care was their number-one concern (followed by protecting current wealth, increased energy prices, minimizing taxes and terrorism).

Not having a plan in place to take care of your health care costs could take a big bite out of the retirement savings you've worked so hard to accumulate. Having the right amount of funding ready begins with understanding how much you will need to save - and what your options are for saving.

HOW MUCH WILL YOU NEED?

According to the 2007 Retirement Confidence Survey from the Employee Benefit Research Institute, assuming Medicare benefits remain at current levels, couples will need approximately $300,000 to cover health expenses in retirement if living to average life expectancy, and as much as $550,000 if living to age 95.

HEALTH SAVINGS ACCOUNTS

As health insurance costs have gone up, a new type of plan - the high-deductible health plan - has been designed for people who don't have a current, frequent need for health care but still want insurance coverage in case something unexpected happens.

Because the premiums are lower (15 percent to 45 percent lower than other plans) the plan carries relatively high deductibles. But, to help pay these deductibles, the federal government has created legislation that lets people establish a tax-advantaged account known as a health savings account, or HSA. An HSA combines an individual's current health insurance plan with a tax-deductible savings account.

Small-business owners who offer a high-deductible plan as an employee benefit could also use an HSA. Proponents of HSAs believe they are important because they help reduce the growth of health care costs and improve the efficiency of the health care system. HSAs were created to encourage people to save for their future health care expenses and adopt high-deductible health plans, which make clients more responsible for their own health care choices.

In 2007, 3.2 million people were covered by HSA-type insurance plans. This growth is predicted to continue: 14 million HSA policies are expected to be opened by 2010.

You should understand the risks and challenges involved in growing and protecting your wealth or you should work with financial consultants who do. Talk with your trusted advisors about putting a plan in place that takes into account the impact future needs in health care may have on your retirement.

• William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior investment management consultant of Morgan Stanley Smith Barney LLC. He can be reached at william.a.creekbaum@smithbarney.com or 689-8704.