The Hidden Drain on Your Retirement Savings

Whatever you think of the movement to reform health care in America, you'll likely agree that health-care costs have risen rapidly in recent years. According to Fidelity Investments, a 65-year-old couple retiring this year will need $250,000 to cover their medical expenses in retirement. To handle that ugly number, you'll need to start preparing now.

This year's figure has climbed only about 4% over last year, but it's a stunning 56% higher than it was in 2002. While Fidelity's math does include Medicare, it also assumes no health-care coverage from a previous employer, and excludes a bunch of additional health-related expenses, such as over-the-counter medications, most dental services, and long-term care.

Recently passed legislation and future reforms may change this picture for the better, but right now, average Americans should prepare to fork over a lot of money for health care, both now and in retirement. If you can invest at a 10% return, you'll still have to save $4,000 each year for 20 years to amass that $250,000. If you only have 10 years, you'll need to squirrel away $14,300 each year.

Obviously, health care is only one of the expenses your nest egg will need to cover. According to our Rule Your Retirement newsletter, you should aim to withdraw about 4% of your total savings annually in retirement, in order to make it last. To get your needed egg size, multiply your desired annual withdrawal by 25. So if you want to take out $50,000 annually, you'll need $1.25 million. Remember, you'll need to prepare to spend a fifth of that total sum on health care. So you'll need to save five times as much as the sample scenarios we cited above to reach that $1.25 million figure.

Take deep breaths
Did those numbers freak you out? Don't panic just yet. It's good to have a handle on how much you need to amass, but don't assume you can't get there. For one thing, you may not even need $1.25 million. Perhaps you have a pension, or considerable Social Security income headed your way. If your needs in retirement are modest, your savings could be, too.

Even if you can't count on any of those fallbacks, you still have options. Working a few more years can help you end up with hundreds of thousands more. (Just look at how much less you need to sock away if you let it grow for five more years.)

You can also save more. If you're contributing 6% of your income to your 401(k), hiking that sum to 10% or 15% can make a big difference. So can a maximum $5,000 annual donation -- $6,000 if you're 50 or older -- to your IRA.

Finally, you can aim to make even more of the money you do save by choosing the best investments. Bonds may seem safer and more stable, but over the long haul, stocks have historically offered the best returns by wide margins.

To find promising stocks, start by seeking companies with solid growth rates and returns on equity, and with P/E ratios of 20 or less. We've assembled a few candidates that meet those criteria:

Data: Motley Fool CAPS.

Once you've rounded up a list of prospects, make sure you do your own research to make sure they're right for you.

It's never too late to make a plan. Figure out how much you'll need in retirement (including health-care expenses), and how you'll get there -- and start socking more money away.

Does $250,000 seem like a reasonable sum for health-care expenses in retirement? Share your opinion in the comment box below.