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Can You Afford a Healthy Retirement?

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Gail MarksJarvis, a personal finance columnist for the Chicago Tribune, is the author of Saving for Retirement. hide caption

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Gail MarksJarvis

Gail MarksJarvis, a personal finance columnist for the Chicago Tribune, is the author of Saving for Retirement.

Read an Excerpt

As they approach retirement age, many people have no idea how much money they will need to support themselves — and they frequently underestimate the cost of health insurance that they'll need to supplement Medicare.

As Chicago Tribune personal finance columnist Gail MarksJarvis reviews the numbers with Renee Montagne, she notes that most households on the verge of retirement have saved no more than $88,000. That amount translates into about $650 a month for living expenses, Jarvis says.

Medicare will cover only part of their health bill, and health insurance alone will cost a retired couple an average $330 per month, she adds.

Below are some of MarksJarvis' tips for avoiding financial troubles in retirement:

• Avoid wishful thinking and calculate what you will need to save by the time you retire.

• A rule of thumb: Go into retirement with savings that equal about 12 times your last annual pay and take out no more than 4 to 5 percent of your nest egg a year.

• Prepare when you are young by saving small amounts early and investing in a mixture of stock and bond mutual funds in 401(k) plans and IRAs. If you invest $20 a week on your first job, you'll reach $1 million by retirement age. Wait until 35, and you will need to save $100 a week for the same sum. And don't give up. A person saving $5,000 a year in middle age can still accumulate about $500,000.

• Consider health care costs as you look ahead. Be realistic. If you are retired for 20 years, you will need about $200,000 in savings to buy extra health insurance to cover what Medicare doesn't. If you live to 90, the cost will be close to $400,000. Medicare only covers part of retiree health needs.

• Check your employment benefits so you don't have unrealistic expectations. Most employers DON'T help their former employees with health insurance in retirement, but many people assume they WILL get this help. Even employers promising health benefits to retirees may back out of the agreement.

• Avoid retiring early unless you have calculated the impact of spending $1,000 a month to buy health insurance until Medicare benefits kick in.

• If you retire early and need to buy health insurance, you can cut your costs by using high deductibles and buying insurance through business or trade groups. Consider starting a small business so you have access to one of these groups, or work part-time for an employer who provides insurance.

• Pay off your home and credit cards before retiring so that you have manageable costs.

Source: Saving for Retirement (Without Living Like a Pauper or Winning the Lottery) by Gail MarksJarvis.

Excerpt: 'Saving for Retirement'

'Saving for Retirement (Without Living Like a Pauper or Winning the Lottery)'


Get Real

People are great at deluding themselves—at telling themselves everything will work out when it won't.

In 2004, Towers Perrin surveyed people within 10 years of retiring. Among those who had saved nothing, 58 percent not only were confident that they would have everything they needed in retirement but expected to be able to take trips and buy luxuries, too.

This delusional thinking gives new meaning to the term "American Dream." We are a nation of optimists, but this takes it a bit too far. So don't fool yourself. If you don't save, Social Security alone won't do it for you, even if the system lasts instead of crumbling the way some analysts are predicting. You won't be buying luxuries. You will be wondering how you will pay for electricity and heat your home or apartment. According to a 2006 survey of seniors done by AARP, half of retirees worry they won't be able to pay their utility bills during the next year.

And it's no wonder. About half of seniors now depend on Social Security to cover at least 50 percent of their living expenses. And the average senior gets $1,011 in Social Security a month.

So let's get real. Think of your lifestyle now, and how you'd handle it if you were living on just $1,011 a month.

But let's take this a step further. Imagine that you have saved what the majority of Americans who are 10 years away from retirement have saved: It's no more than $88,000, according to the latest research by the Congressional Research Service. What would $88,000 give you? If you bought an annuity when you retired—an insurance policy that promises you a certain monthly income for life—you would be able to buy one that would give you about $653 a month.

So that's perhaps $653 from your lifetime savings, and $1,011 in Social Security—or about $1,664 a month to live on.

How does that sound?

Oh, and one more thing. People often think Medicare will cover all their health needs in retirement. But that's not true. The average retired couple has to pay about $330 a month for extra health insurance, because Medicare pays only part of what people need, according to the Medicare Payment Advisory Commission. And then there are prescription drugs. Remember, older people aren't usually as fit as younger people.

Perhaps you've heard that there's a new Medicare program that provides free drug coverage. But that's not true either. It helps pay for drugs. Even with the new coverage, the ordinary retiree will have to spend about $790 a year for prescriptions, according to a Congressional Budget Office estimate.

So now look at a monthly income of about $1,268 after paying for medical insurance and medicine.

Could you handle it?

Books Featured In This Story

Saving for Retirement Without Living Like a Pauper or Winning the Lottery

Retirement Planning Made Easy

by Gail Marksjarvis

Paperback, 247 pages |


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Saving for Retirement Without Living Like a Pauper or Winning the Lottery
Retirement Planning Made Easy
Gail Marksjarvis

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