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Plan Now for Health Costs in Retirement

Don't let future out-of-pocket costs deplete your savings

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Medicare is composed of four parts: Part A (also known as "Original Medicare," which provides hospital care), Part B (nonhospital medical care), Part C (also known as "Medicare Advantage," private HMO or PPO plans that combine parts A, B and D, and may have lower out-of-pocket costs) and Part D (prescription drug coverage).

Although most people don't pay premiums for Part A (because they already paid for it through their payroll taxes), there are deductibles and coinsurance requirements for all four parts, and premiums to pay for parts B, C and D.

When you're choosing the best Medicare plan for you, the lowest premium may not be the lowest-cost plan overall. Even Part A charges an annual deductible of more than $1,100. And if you do end up hospitalized with just Part A coverage, let's hope you don't stay long: After two months in the hospital, you're expected to pay almost $300 per day out of your own pocket. After three months, you'll be charged almost $600 per day.

Out-of-pocket charges may be lower and more predictable under a Part C Medicare Advantage plan than under Original Medicare. The downside to these Advantage plans is that they usually limit your choice of doctors and hospitals.

You should plan to reevaluate your Medicare coverage needs each year during the open enrollment period, which runs from Oct. 15 to Dec. 7.

If you're under 65 and have a high-deductible insurance plan ($1,250 or more), you might want to consider setting up a health care savings account now. Your contributions are tax-deductible, they're invested in the stock market, and they grow tax-free. And if you use the money to pay for medical expenses, you're not taxed on the withdrawal. Best of all, unlike traditional flexible spending accounts, the money rolls over from year to year, helping you build a health care nest egg for your later years.

Bear in mind that the calculator doesn't compute the cost of long-term care. With any luck, you won't need it. But again, that's not something I would gamble on.

Jean C. Setzfand is vice president of the Financial Security issues team in the Education and Outreach group at AARP. She leads AARP's educational and outreach efforts aimed at helping Americans achieve financial peace of mind in retirement. She can be reached at jsetzfand@aarp.org and you can follow her on Twitter @JSetz.

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