Many employees are ill-prepared for their retirement healthcare costs, but relatively few companies are doing anything about it.
Four years ago, at the age of 57, Bob Zimmerman was contemplating retirement. A teacher in the life sciences in the Cincinnati school system, Zimmerman knew his retirement income would be higher if he continued teaching for a few more years, but he was ready to step down.
He didn't want to make the decision in the dark: He wanted to look at figures side-by-side showing what his retirement income, health insurance and other expenses would be if he retired at 58, compared with staying on longer.
Zimmerman was lucky: The Ohio State Teachers Retirement System (STRS Ohio), which administers retirement and health benefits for all public educators in the state, offers abundant encouragement and help to its employees in planning for retirement, sending counselors around the state to conduct pre-retirement seminars as well as offering one-on-one sessions for workers considering retirement.
"I was aware of all those things, and I went to a couple of seminars," says Zimmerman. "You start getting letters when you get within so many years of retirement, putting a buzz in your brain so you will start budgeting and planning."
Healthcare is a central part of both the seminars and the counseling, says Laura Ecklar, director of communications at Columbus-based STRS Ohio. Active teachers in Ohio pay relatively little for health insurance compared to private-sector employees, she says. Once they retire, they continue to receive state-subsidized health insurance, but they pay more, and her organization aims to give prospective retirees as much information as they need to help them prepare.
"Seventy-five percent of our retirees have spent their entire careers in education, so they don't have a good sense of the true cost of healthcare," says Ecklar. "We don't want them to have sticker shock when they retire."
The state agency appears to be one of the few organizations that put an emphasis on helping workers think seriously about how much they will need during retirement to pay for their healthcare.
As more and more cash-strapped employers drop pension plans and health insurance for retired employees, a growing number of people are drifting into retirement not realizing how quickly medical expenses will eat away at their nest eggs.
A recent survey of 1,000 retired Americans ages 65 or older found that more than half neglected to consider what their healthcare or prescription expenses would be when they planned for their retirement. And about one-third end up spending far more in medical costs than they'd anticipated.
The survey, titled America's Unhealthy Nest Egg and sponsored by Medco Health Solutions, a pharmacy benefits manager based in Franklin Lakes, N.J., found that even after retirement, about half of those surveyed had made no effort to calculate how big a bite healthcare was taking out of their finances.
Jennifer Luddy, a senior manager at Medco, says she doesn't know whether prescriptions or other medical costs are a bigger factor, but the survey showed that medications alone accounted for $1 of every $10 spent by middle-income retirees.
And as for future retirees, even those lucky enough to work at the dwindling number of employers that still offer retiree healthcare benefits will face a crunch: Watson Wyatt estimates that the level of employer financial support will drop to less than 10 percent of total retiree medical expenses by the year 2031.
Employers can go a long way to educate their workers about medical expenses in retirement, but so far, few are doing so, says Sharon Alt, president of Alt Benefit Consultants, a third-party administrator in Fort Worth, Texas. "There isn't enough education out there," she says.
Michelle Holzer, program manager for Maryland's Senior Health Insurance Assistance Program, which provides one-on-one counseling for people who have questions about Medicare, says her staff is seeing large numbers of retirees who didn't understand what their benefits would be in retirement or how much their healthcare would cost them.
"They're not getting the right information," she says. "It's not explained to them what Medicare covers, what it doesn't and why they need some supplemental insurance. They're not getting much guidance, so they're coming to us with problems."
Some of the retirees she and her staff see had unlimited coverage for prescription drugs under their employer's plan, but they decided to drop it because of the high premiums, she says. Some of them switched to a lower-priced plan without realizing that a medication they take on a regular basis wouldn't be covered at all.
The misinformation is so widespread, says Holzer, that some SHIAP employees are starting to offer to go to workplaces to present information to pre-retirees about what they should look out for.
Helping employees calculate their future health expenses before they retire is all the more crucial these days, as the cost of healthcare in retirement is rising at a rapid pace and few retirees can look forward to the sort of health benefits that Ohio public educators enjoy.
A survey by Fidelity Investments, released in March, estimates that a 65-year old couple retiring this year will need, on average, about $225,000 for medical expenses -- a 4.7 percent increase over last year's estimate. That figure is for people without employee-sponsored retirement healthcare benefits, but it doesn't include the cost of over-the-counter medications, most dental procedures or long-term care.
The reasons for the jump in costs, according to Fidelity, include more expensive doctor visits, better and higher-priced technologies, improved diagnostic testing and a rise in chronic diseases such as diabetes.
Counselors at STRS Ohio start talking to employees about healthcare in retirement early in their careers and continue providing support after they retire.
Workers who are within 10 to 15 years of their retirement date are invited to seminars designed to get them thinking about how much they should be putting aside to cover healthcare and other expenses during their golden years, says Gary Russell, director of member services.
Seminars for those closer to retirement cover, among other things, their health plan options -- how much they'll pay for premiums, how much out-of-pocket, and so forth. Worksheets are provided to help them think about what they currently spend money on and what they'll need post-retirement.
One-on-one sessions, for those thinking about retiring soon, delve into the nitty-gritty, with counselors downloading benefit information and going over numbers in greater detail. "We'll show them whatever scenarios they want," says Russell. "We'll look at two or three different retirement dates and different health-plan options. We'll also point out things they might not think of -- [for instance] that under our benefit structure, there's a kicker: Benefits are enhanced after 35 years of service, so if someone is looking at retirement after 32 years, we'll look at 35 years, too."
At the bottom of the worksheet, counselors also include data on what their health benefits would cost if the state were no longer able to offer subsidies.
STRS Ohio is a self-insured organization, says Ecklar. "For a number of years, we were able to provide healthcare very inexpensively, but the same things that have hit healthcare nationally have hit us too. We now have pending legislation to get a dedicated stream to fund our program."
Should the legislation not pass, and retiree health plans are no longer subsidized, the agency wants to be certain seniors know what to expect, she says.
STRS Ohio's support doesn't stop when workers retire. "In another program, targeted for people already in retirement, we talk about how to use the healthcare plans, how to file claims, who pays the primary claims and who pays the secondary claims," says Russell. Also covered is information about co-pays and ways to save money, such as using generic drugs and mail-order pharmacies.
When Reality Strikes
More and more employers are starting to think about ways to help their workers ease into retirement armed with more information.
Carl Mowery, senior managing director of Smart Business Advisory, a consulting firm in Chicago, has one client -- a school system in suburban Chicago -- that has started holding retirement fairs, where employees can learn about their healthcare and retirement options and about planning ahead -- as well as take advantage of wellness opportunities such as blood-pressure screenings.
"We were concerned that people were nearing retirement without realizing the costs associated with retirement," says Mowery. The school system offers subsidies for those retiring early, he says, "and we wanted to insulate them from the reality that will strike when they get to age 65 and the subsidies go away."
The school system encourages attendance by people who are within five or 10 years of stepping down, but also younger workers -- even those just starting out, he says.
Other employers are beginning to help their workers estimate how much they'll need to save for healthcare in retirement and offering financial products to make that easier.
Boston-based Fidelity Investments has created a calculator that allows workers to plug in specific information about their current health, including chronic diseases, their financial situation and their projected retirement age, then get a ballpark figure representing how much they may need for healthcare in retirement.
Medco, the pharmacy benefits company that conducted the retirement survey, has developed a free consumer brochure that lists six ways to cut down on health expenses. These include using mail-order pharmacies, using generic drugs and using the Web sites of PBMs to compare costs.
Medco also suggests that retirees ask their doctors about so-called "dose optimization," which can include getting half as many pills at double the dose and then taking the medication half as often, or getting the pharmacy to cut the pills in half.
Not everyone agrees with that last piece of advice.
The Food and Drug Administration cautions against pill cutting, says Sandy Walsh, an FDA spokeswoman. First of all, some drugs should never be split. For example, cutting time-release medications can cause too much to enter the bloodstream at once, and splitting pills with certain coatings can allow the active ingredients to irritate the digestive system.
The FDA urges consumers not to split their own pills, in part because many people, especially the elderly, may not have good enough eyesight or dexterity to do so. However, many pharmacies prefer not to cut them. Harold Kramm, a pharmacist and owner of Center Pharmacy in Washington, says even a pharmacist might not split pills quite evenly. With some medications, that can be a problem, he says.
As for doubling the dose and taking it half as often, Kramm warns that it's important to take pills at the intervals specified in the directions to keep a steady dose in the bloodstream.
Medco's Luddy says patients should always speak to their doctors first about dose optimization. "The doctor is the only one who can decide whether it's clinically appropriate for the patient and the particular type of medication," she says.
Three years into his retirement, Bob Zimmerman, the Cincinnati schoolteacher, is right where he thought he would be financially. After retiring at age 58, he cuts corners here and there, but is thankful for the advice he received from STRS Ohio. "It turned out to be pretty accurate," he says.