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Why You're On the Hook for $200,000

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Americans are certainly known for having their excesses. Unfortunately, saving for retirement doesn't usually happen to be one of them.

The average citizen is woefully underprepared for his or her golden years. And while some folks may pride themselves on being ahead of the curve and having a fatter 401(k), a new study has come out with some alarming numbers that show why a comfortable retirement may be even more out of reach than previously expected.

Dangerous diagnosis
Recent data from the Center for Retirement Research (CRR) at Boston College estimate that a relatively healthy 65-year-old couple can expect to spend $197,000 on health-care costs over the course of their remaining lives. Ouch! And that amount doesn't even include nursing-home costs, which would further inflate that total. According to the study, when the costs of nursing-home care are included, there is actually a 5% chance that total health-care expenses could exceed $570,000. That's quite a shocker, given that few retirees have surpassed the half-million-dollar mark in assets.

But won't Medicare help defray health-care costs? Well, it will certainly cover a fairly wide range of expenses, but as anyone who has dealt with Medicare can tell you, it won't cover all services that you may need. Additionally, Medicare coverage is subject to (sometimes hefty) co-payments and/or monthly premiums. The CRR's study fully takes Medicare coverage into account, meaning that you'll need at least $200,000 more over your lifetime beyond what coverage you can expect from the government. That means we've all got some work to do to meet these demands.

Planning ahead
If you can afford the premiums, you might want to consider purchasing long-term care insurance to fill some of the gaps left by Medicare. According to the U.S. Department of Health and Human Services, roughly 70% of adults over age 65 will need some type of long-term care during their lifetimes. Long-term care is generally not provided by Medicare, so these costs can quickly add up. To learn more about long-term care insurance, take a look at the Health and Human Services National Clearinghouse for Long-Term Care website as a good starting point.

The staggering costs of health insurance late in life certainly aren't reassuring for millions of Americans struggling to save anything at all for retirement. But the fact remains that we've all got to do a better job of saving if we want to be able to pay for health care in our old age. That means taking control of spending and cutting down on some unnecessary items. To get a better grip on where your money goes every month, think about getting familiar with a personal-finance program like Quicken (on your desktop) or Mint.com (online). Once you've analyzed your spending patterns, you have a better chance of seeing where you can cut and boosing your retirement savings instead.

Goosing your nest egg
Of course, even if you've managed to amass a meaningful nest egg, you've still got to invest those dollars for the long haul. Unfortunately, like too many workers, you may be stuck inside a high-cost 401(k) or other retirement plan with few good investment options. If that is the case, make sure that you're at least maximizing any matching dollars that the company may offer you. Even if this money in invested in less-than-optimal funds, you'd be crazy to pass up any free money.

Once you've maxed out any matching contributions, think about opening up an IRA, where you have more freedom in picking investment options if your regular retirement plan leaves a lot to be desired. In this case, going with some broad-based, inexpensive exchange-traded funds might not be a bad idea, once you've got your asset-allocation plan down pat. Some of the better options include:

Exchange-Traded Fund

Types of Companies Invested in

Vanguard Total Market Stock ETF (NYSE: VTI  )

Apple, Procter & Gamble (NYSE: PG  )

iShares Russell 2000 ETF (NYSE: IWM  )

Palm (Nasdaq: PALM  ) , RF Micro Devices

Vanguard FTSE All-World Ex-US ETF (NYSE: VEU  )

Total SA, Petroleo Brasileiro (NYSE: PBR  )

iShares Barclays Aggregate Bond (NYSE: AGG  )

U.S. Government & Agency Bonds; Investment-Grade Corporate Bonds

Likewise, when it comes to long-term investing for retirement, remember to keep it simple. Stick to inexpensive ETFs and actively managed funds that invest in broad swaths of the market. Leave the single-country funds and triple-leveraged inverse ETFs to someone else. Although it may be difficult to ignore the hot trends of the minute, just remember that today's superstar winners (gold, anyone?) could very likely end up being tomorrow's underperformers. Keep your focus on your long-run goals and try to tune out the day-to-day noise in the market. It isn't easy, but ignoring short-term trends is vital to your success.

Health-care costs may seem like a huge dark cloud looming over our golden years, but with a little bit of planning, and a lot of saving, we can ease into retirement with a hefty cash cushion. Still, it won't get any easier by waiting for tomorrow, next week, or next year. Take steps to meet these demands now -- down the road, you'll be glad you did.

For more insider investing and personal financial planning tips, check out the Fool's Rule Your Retirement service, which provides top-notch retirement and mutual fund advice. You can start your free 30-day trial today.

Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter. At the time of publication, she did not own any of the funds or companies mentioned herein. Apple is a Motley Fool Stock Advisor selection. Petroleo Brasileiro, Procter & Gamble, and Total SA are Motley Fool Income Investor picks. The Fool owns shares of Procter & Gamble. The Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 05, 2010, at 10:39 AM, JesseSlome wrote:

    Good advice. When doing long-term care planning know that you must health qualify for this protection, and there are many ways to right size insurance protection and bring the cost way down. Consumers interested in learning including information on pricing, a listing of leading LTC insurers and their ratings, how to save and even the latest tax deductibility rules should visit the American Association for Long-Term Care Insurance's online Consumer Information Center. As the non-profit trade organization, they offer the best unbiased source of information on long-term care insurance freely accessible to the general public. Click on this link to read the free guide Reducing The Cost of Long-Term Care Insurance <a href> http://www.aaltci.org/free-guide/ </a>. No personal information is required to access the guide.

    Jesse Slome

    Executive Director

    American Association for Long-Term Care Insurance

    <a href> http://www.aaltci.org/ </a>

  • Report this Comment On March 06, 2010, at 8:38 AM, LTCQueen wrote:

    Thank you for calling attention to the need for responsible long-term care planning. Your column is factual, practical and direct.More reporting on this issue is needed; you do your readers a service. People should pay attention to LTC planning while they are healthy, empowered, and able to find reasonable premiums.

    Honey Leveen

    LTC Insurance Specialist for 20+ years

    www.honeyleveen.com

    www.ltcqueen.com

  • Report this Comment On March 06, 2010, at 11:32 AM, LTCQueen wrote:

    http://www.ltcqueen.com/?p=988 Here is a blog about this column. Thanks again for helping the public by offering this info.

  • Report this Comment On March 06, 2010, at 12:29 PM, ScottAOlsonLTC wrote:

    Should the wealthy own long term care insurance? Today, most business owners (and self-employed persons) can use pre-tax dollars to protect their personal assets with LTC insurance.

    Also, there are LTCi policies available that will refund all the premiums to your heirs (even if you were on claim for a lengthy period of time.) The returned premiums can be passed to your heirs outside of the estate, through a trust.

    Additionally, the policy’s benefits can be paid to the trust and passed to the heirs outside of the estate.

    This can be an effective strategy for reducing the size of your taxable estate, while increasing the assets passed on to your heirs.

    Scott A. Olson

    <a href="http://www.LTCInsuranceShopper.com">www.LTCInsuranceShopper.com</a>

  • Report this Comment On March 06, 2010, at 12:30 PM, ScottAOlsonLTC wrote:

    Should the wealthy own long term care insurance? Today, most business owners (and self-employed persons) can use pre-tax dollars to protect their personal assets with LTC insurance. Also, there are LTCi policies available that will refund all the premiums to your heirs (even if you were on claim for a lengthy period of time.) The returned premiums can be passed to your heirs outside of the estate, through a trust. Additionally, the policy’s benefits can be paid to the trust and passed to the heirs outside of the estate. This can be an effective strategy for reducing the size of your taxable estate, while increasing the assets passed on to your heirs.

    Scott A. Olson

    <a href="http://www.LTCInsuranceShopper.com">www.LTCInsuranceShopper.com</a>

  • Report this Comment On March 06, 2010, at 1:10 PM, bcchamp wrote:

    while planning for all eventualities is a good thing but death will come to us all. I watced my Dad work his whole life to age 69 and then follow that up with a stroke and a triple bypass. Now since he hasn't left his chair so to speak for 8 years how much money did he really need for retirement. I am not saying that will happen to all of us but how much do you really need to save -how much partying and holidaying do you think you will have the energy for after around age 75.

  • Report this Comment On March 06, 2010, at 1:12 PM, bcchamp wrote:

    why did i type my comment if it was going to disappear

  • Report this Comment On March 06, 2010, at 1:12 PM, bcchamp wrote:

    ah there it is

  • Report this Comment On March 08, 2010, at 9:14 AM, Global10 wrote:

    So I guess I won't know if saving for retirement is actually saving for health care until sometime after I retire. What a crap shoot!!!!

  • Report this Comment On March 08, 2010, at 11:17 AM, jfenlon wrote:

    You can't control genetically caused illness nor can you avoid the automobile accident caused by a witless drag racer or drunk driver. You can terminate the tobacco habit, you can stop having a scotch or martini every day, you don't have to consume large amounts of red meat every week, and you can walk for 30 minutes every other day. You can buy a pair of lightweight dumbbells and lift them while watching TV.

    You can do the crossword or Sudoku every day to keep your mind active. The fact that you sit in front of a computer all day doesn't mean that you are thinking creatively. You can take charge of the things within your power to do something about. What if misfortune doesn't happen?

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Amanda Kish
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Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter.

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