You may have heard that your future retirement will rest on a three-legged stool: Social Security, a traditional pension plan (a.k.a. a defined-benefit plan), and personal savings (often in the form of 401(k)s and IRAs). But those who want a really sturdy plan on which to perch their golden years should start working on a fourth leg: health care.

It looks like 2003 will be the third consecutive year that the cost of health care in America will increase at a double-digit pace. These rising costs should be disconcerting to every American, but it's an especially important topic to retirees. All those years of working, recreating, conjugating, and procreating take their toll on a body, increasing the need for repairs and tune-ups.

Also, most retirees live on a "fixed income," that is, their yearly inflow doesn't change much, especially if they're relying mostly on Social Security and pension benefit checks. In fact, many retirees gradually lose ground through the years since most pensions checks aren't adjusted for inflation and savings are gradually depleted. Thus, anyone on a fixed income has trouble coming up with ways to pay for rising costs.

So how can you tell if the fourth leg of your retirement will be strong enough to last the rest of your life? Let's look at the major ways retirees cover their medical bills, and what those sources might look like in the future.

As long as you've contributed enough to the program (most Americans have, through FICA taxes) you'll be eligible for Medicare when you turn 65, regardless of whether you're retired or not. Medicare has two parts. Part A, which covers hospitalization, is free to most Medicare recipients. Part B covers doctor visits and various other medical services, and has a monthly premium that changes each year. For 2003, the Part B monthly premium is $58.70 per person.

But that's just the beginning of the "out of pocket" expenses for Medicare recipients. There are many other medical necessities that Medicare will not pay for, including prescription drugs. (That may change soon, but participants will still have to pay hundreds to thousands of dollars, and taxpayers will pay $400 billion.) To fill the holes, recipients can choose a Medicare+Choice plan, which are provided by HMOs, or a Medigap plan, which is supplemental insurance that covers a range of services, depending on which of the 10 types you choose. But however you cover the services that Medicare doesn't, it is an out-of-pocket expense with an increasing price tag.

Then there's the question of whether Medicare can continue to provide the services it does. Just like the Social Security program, most of the taxes collected for Medicare are used to pay the benefits of current retirees. The funds not spent go into the Hospital Insurance (HI) trust fund.

However, as the Baby Boomers begin to retire, taxes collected won't be enough to pay benefits delivered, so the Medicare program will begin to dip into the trust fund, eventually depleting it. According to the 2003 annual report of the Medicare trust funds:

[T]his process would begin in 2013 and continue through 2026, at which time the fund is projected to be exhausted. The projected year of exhaustion is often characterized as the "crisis point" for the HI trust fund. In practice, however, the demands on general revenue (to redeem the treasury bonds held by the trust fund) would create a very serious situation for federal funding years before the exhaustion date. By 2025, in the absence of legislative corrections, an estimated 26 percent of HI expenditures would have to be met by redeeming assets as opposed to being covered by tax income for that year.

In other words, the Medicare program will be able to pay for less than three-fourths of its obligations in a little more than two decades. America, prepare for higher taxes and fewer benefits.

Insurance from a former employer
Many large companies and unions provide health insurance as a retirement benefit to its employees and members. Just like the traditional pension plan, however, this benefit is becoming a thing of the past. According to the policy journal Health Affairs, the percentage of Medicare beneficiaries in the 65-69 age group receiving employer-sponsored health insurance fell from 46% to 39% from 1996 to 2000. A Kaiser Family Foundation survey found that the percentage of companies with 200 or more workers that offer retiree health benefits has dropped from 66% in 1988 to 34% in 2002.

While health-care coverage in retirement is an excellent benefit, it doesn't necessarily shield retirees from higher costs. For example, retired policemen and firemen in Ohio will see their premiums increase as much as 300%. And the benefit can be lost entirely, as former workers of the bankrupt Bethlehem Steel are finding out.

Personal savings
Any medical expenses not covered by insurance or Medicare must be paid for out of a retiree's nest egg. How much will be needed to cover such expenses? According to the Employee Benefit Research Institute, someone retiring in 2003 would need $37,000-$750,000 if she has employment-based health insurance, and an astonishing $47,000-$1,458,000 if she will rely on Medigap.

Conventional wisdom says that a retiree could live on 70%-80% of pre-retirement income. However, the rising cost of health care may prove that's not enough. The amount you'll need depends on many factors, but you can get a rough estimate buy using the retirement health savings calculator at

What to do?
Despite all the gloom and doom, there are ways to reign in health care costs, or at least be prepared for them:

  • Become informed and active: Find out what's happening to the Medicare program, and let your voice be heard. Start at the horse's mouth by reading Medicare & You. Also, visit the Health Insurance and Medicare Web pages provided by AARP (which calls health care "the fourth pillar," which might be more appealing than "fourth leg" to those with grander visions of retirement).

  • Stay healthy: The best way to save on medical costs is to not need medical help. Eat right, exercise, and do all that other stuff you know you should do.

  • Get employer-provided insurance: The next time you change jobs, consider retirement benefits as a factor. If you already have this benefit, evaluate your company's ability to provide health care decades down the road.

  • Save like mad: Read our 60-second guides on opening an IRA and maximizing your 401(k).

  • Keep working: Many retirees return to the working world because retirement can be boring. But working also has the benefit of health-care coverage and flexible-spending accounts, which let workers sock away money for medical expenses pre-tax -- which is like shaving more than 30% off your doctors bills.

  • Get help: Seek out objective, professional advice if all this makes your head swim -- or if you'd just like a second opinion. Our TMF Money Advisor is a great place to start.

My radical proposal
Finally, there's the issue of why Americans need so much health care. Let's face it: As a country, we have a lot of bad habits, which lead to bad health, which lead to higher medical bills. As a way to encourage Americans to lead healthier lives, taxpayers should be able to participate in a program by which a clean bill of health from their doctor earns a tax credit. If you can prove that your weight, blood pressure, respiratory function, and cholesterol are all in a normal, healthy range, then you get a break. I know, there are plenty of logistical problems with this plan, and I'll gladly discuss them later. Right after I've finished my Big Mac.

Robert Brokamp is the co-author of The Motley Fool Personal Finance Workbook and the author of The Motley Fool's Guide to Paying for School .