How good health will pay off during retirement

If you're worried about health care costs during retirement, you're not alone. A recent study from Fidelity Investments indicates that 84 percent of survey respondents wonder if they'll be able to cover their health care costs over the entire course of their lifetime.

But the problem may be even greater than they think: Almost three-quarters (71 percent) of respondents expect to have better-than-average health in retirement, an example of the "Lake Wobegon effect," where "all the children are above average."

It might actually be more realistic to assume your health will be worse than average. According to the Centers for Disease Control and Prevention, 35 percent of all U.S. adults are considered obese, and only 20 percent meet the Centers' overall physical activity recommendations.

Fidelity's research suggests that many Americans are underestimating how much money they'll need to pay for medical costs during retirement. In a study the company conducted last year of pre-retirees (ages 55 to 64), nearly half (48 percent) estimated they'll need about $50,000 per person ($100,000 per couple) to cover health care costs during retirement.

However, Fidelity's annual Retiree Health Care Cost Estimate found that the average 65-year-old couple could actually expect to spend more than $220,000 in Medicare premiums and out-of-pocket medical expenses during retirement.

That's the bad news. The good news is, taking steps to improve your health has the potential to save you lots of money.

Fidelity estimates that an individual in poor health with a pre-retirement income of $80,000 would need an annual retirement income of about $76,800 to cover all essential living expenses during retirement. But the same individual in excellent health would need an annual income of about $61,600. This means poor health can increase the amount of retirement income this person will need by about $15,200 per year.

Using the four percent rule to generate retirement income from savings means this retiree will need to have an extra $380,000 in retirement savings to generate that additional $15,200 annually.

Many sites, including CBS MoneyWatch, offer helpful calculators that show how much retirement income you might need, depending on how much income you have before retirement and how much you plan to spend on travel, recreation and health care during retirement. These tools could show that to retire comfortably, you might need more financial resources than you currently have on hand.

Before you panic, let's see what you can do to better manage your health care costs during retirement. First, be very motivated to take any steps you can to improve your health. This means bringing your weight to a healthy level, getting sufficient exercise and eating a healthier diet (which typically means eating more fruits and vegetables, less meat, less fat, less sugar and less processed foods). You'll also want to eliminate unhealthy behaviors such as smoking or abusing alcohol.

I know these steps are easier said than done. To help you succeed, you may want to use findings from behavioral finance research to learn strategies to help you change your unhealthy habits.

In addition to improving your health, you'll want to be able to pay for health care costs when you need to. This means buying adequate medical insurance if you retire before age 65, when Medicare starts, and making informed choices about Medicare and supplemental insurance. You'll also want to save as much money as you can for retirement, including making contributions to a Health Savings Account, if you're eligible.

Are you concerned you might not have that $220,000 in savings right now to fund your lifetime retirement medical costs? Keep in mind that to pay for medical costs over your lifetime, you can use your monthly Social Security income, a pension if you have one, your savings and medical insurance. You don't need to have $220,000 set aside at retirement that's devoted exclusively to covering medical costs.

If you run the numbers for your retirement, taking into account estimated costs for medical expenses, you might find you need to work longer than you had planned. But that might not be so bad because working can give you social engagement and purpose in life, and maybe even make you eligible for subsidized medical insurance from your employer.

Also consider the evidence that working longer can lead to improved health and longer lifespans.

The bottom line is, you'll have a much better retirement if you plan for it. And your planning needs to consider how you'll manage your health care costs. So, start taking steps now to plan for the retirement you want.