Those projections about how much you’ll need to save to cover health care costs in retirement? Better increase them.
New research from the nonpartisan Employee Benefit Research Institute found that the range of retiree health savings targets rose between 0-6% between 2015 and 2016, though that was the first year of increase after several years of decline.
As for the culprit in the increase, while EBRI noted that there were various factors at play, “the main reason for the increase in needed savings is related to the yearly adjustment for out-of-pocket spending for prescription drug use.” Since actual out-of-pocket spending for prescription drugs in the most recent data turned out to be higher, future estimates have gone up.
The range of increases depends on how much health expenses a person is likely to have and how high a probability they want to have enough money on hand. Specifically, EBRI found that in 2016, a 65-year-old man would need $72,000 in savings and a 65-year-old woman would need $93,000 if each had a goal of having a 50-50 chance of having enough savings to cover health care expenses in retirement. If they wanted to boost those odds, say to a 90% chance of having enough savings, the man would need $127,000 and the woman would need $143,000.
Not surprisingly, considering what’s driving those costs, those with high prescription drug costs would need to save substantially more. For a married couple both with drug expenses at the 90th percentile throughout retirement who want a 90% chance of having enough money saved for health care expenses in retirement by age 65, they’d need targeted savings of $349,000 in 2016.
One more note of caution: Since this particular EBRI analysis does not factor in the savings needed to cover such things as long-term care expenses, retirement earlier than becoming eligible for Medicare, and higher Medicare premiums related to higher income, “many individuals will need more than the amounts cited in this report.” Of course, those who choose to work past age 65 may require less.
EBRI’s latest analysis updates its previous estimates on savings needed to cover health insurance premiums and health care expenses in retirement. As before, it points out that projections of savings needed to cover out-of-pocket expenses for prescription drugs are highly dependent on the assumptions used for drug utilization, which is why the analysis provides three sets of estimates for prescription drug use:
- at the median (mid-point, half above and half below) throughout retirement;
- at the 75th percentile throughout retirement; and
- at the 90th percentile throughout retirement.
The report notes that Medicare was never designed to cover health care expenses in full. In 2013, Medicare covered 62% of the cost of health care services for Medicare beneficiaries ages 65 and older, while out-of-pocket spending accounted for 13%, and private insurance covered 13%.
The full report, “Savings Medicare Beneficiaries Need for Health Expenses: Some Couples Could Need as Much as $350,000,” is published in the Feb. 1, 2017 EBRI Notes, online at www.ebri.org.