Health care costs force many clients to rethink retiring early.

For many clients, and even advisors, the ability to plan ahead for an early retirement is often predicated on disciplined saving and wise investments.

Over the past few years, however, clients and their advisors are finding another factor increasingly springing up as a key-and sometimes determining-factor in early retirement planning: health care costs.

The dramatic rise in health care costs in recent years has gotten to the point where this one line item in a client's retirement plan can make or break a goal of retiring before the Medicare-eligible age of 65, advisors say.

"It's been an issue the past four to five years that has, at least in my humble opinion, been coming to a head the last year or two," says Dick Hammel, of Hammel Financial Advisory Group in Nashville, Tenn. "It's something that really needs to be faced and publicized well to the average consumer."

Part of the problem, advisors say, is that clients who have spent their whole careers living under an employer-sponsored medical plan will start setting retirement goals without being aware of how much income individual health insurance premiums can consume. By the time they're ready to sit down with an advisor and put their plan to print, they get blindsided by the health care issue. Yet even those clients who are aware of the issue aren't in a much better situation, simply because there's little they can do to offset the costs. Some advisors relate cases in which insurance premiums suddenly obliterate 30% or more of a client's income, sometimes dashing all hope of retiring anytime before the age of 65.

"I can tell you that I've had in the last year a good four to six clients who had health care costs as one of the primary issues as to whether they thought they should retire or not," says Mark Berg, a fee-only advisor with Timothy Financial Counsel in Wheaton, Ill. Few clients realize the hit their retirement plans take going from an employee-sponsored plan, where workers pay about 30% of the cost, to a self-funded individual plan, he says. "Everyone is surprised."

It is a frustrating issue, says planner Chris Cooper, because it affords clients and their advisors so few options-even if clients are perfectly healthy. When it comes to bridging the gap between an early retirement and Medicare eligibility, clients' have the opportunity to purchase COBRA benefits during the first 18 months of their retirement. After that, clients are basically on their own in finding individual plans. In some situations, such as when a spouse suffers an illness that essentially makes them uncoverable, these costs can make an early retirement impossible. There are some changes down the road that could help. One tool on the horizon, health savings accounts (HSAs), allows clients to set up pre-tax savings accounts to help fund low-premium, high-deductible medical insurance. But few HSAs are currently available, and advisors seem divided on how much impact they will have.

"I've seen quite a few clients abandon their retirement plans because of this issue alone," says Cooper, who owns Chris Cooper & Co., an advisory firm in Toledo, Ohio. "Once they see the price, they just don't want to do it."

And the prices keep on soaring. Increases in health care costs, according to government statistics, have outpaced inflation for six years in a row. Many experts predict it will happen again in 2004. Furthermore, the gap between the Consumer Price Index and health-benefit costs has been stark. While annual increases in the CPI have been under 5%, increases in health care costs have been 10% or more in recent years. Medical costs, in fact, have outpaced the CPI for 13 out of the past 17 years, according to the U.S. Bureau of Labor Statistics.

Each passing year of increases has, for some clients, amounted to another brick in a wall separating them from plans to retire before the age of 65. That's because advisors say there's no way around them. Unlike investments, upon which advisors can apply some creative thinking, health care costs represent an unmovable obstacle. Unlike living expenses, they can't be adjusted down without major consequences. And, advisors note, you can't shop around for better prices without facing a monumental risk if a serious illness or injury happens. Short of the availability of HSAs, there's little clients and advisors can do except deal with the costs and work around them.