Saving for healthcare costs

Fidelity Investments estimates that retirees need to save about $215,000 just to pay for healthcare costs during retirement.

Assuming that a couple, age 65, retires in 2007 with no employer sponsored coverage, the husband will have a life expectancy of 17 years while his wife's life expectancy will be 20 years - to age 85. The study excluded such variable costs as over-the-counter medications, most dental services, and long-term care. The 2007 estimate is a +7.5% increase over last year's estimate.

Health Savings Accounts (HSA's) are one tool that can be used to manage this expense. Because healthcare expenditures are not spread out evenly throughout retirement, those lucky enough to go several years without a significant expense can save money tax-free in a HSA account. Families can set aside $5,650 annually. Unused funds can accumulate, tax-free, for later-year obligations. An HSA is paired with a high-deductible insurance policy to insure against the risk of major medical expenses.

Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.

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