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Can You Afford a Healthy Retirement?

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

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.

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