Trying to figure out how much money an individual or couple needs to live on in retirement is, to put it mildly, a complicated business.
As advisors well know, it depends on a range of factors, including the age at which the individual retires, where they live, how they live, marital status and health. It can also be impacted by the markets, both before and after retirement.
At EBRI, we’re often asked to come up with a single number that individuals can use to set their retirement savings goals — and while it’s certainly possible to do so (and others have), what’s often glossed over is that while that approach appears to offer clarity, a single number based on averages will be wrong for the vast majority of the population. [1. For more on the shortcomings of this approach, see “Single Best Answer.”] Moreover, frequently overlooked in the generalizations about retirement spending levels is, as noted above, the very real financial impact of post-retirement health care expenses.
As advisors are increasingly aware, individuals will be responsible for saving for health insurance premiums and out-of-pocket expenses in retirement for a number of reasons. Medicare generally covers only about 60% of the cost of health care services for Medicare beneficiaries age 65 and older, while out-of-pocket spending accounts for 13%.
The percentage of employers offering retiree health benefits has been falling, even in the public sector; and when offered, those benefits are becoming less generous. Consequently, trying to hit that retirement needs “target” can feel like aiming at a bulls-eye that is not only moving fast, but is zig-zagging away from the bouncing, moving vehicle in which you find yourself.
Using a simulation model, we recently estimated the amount of savings needed to cover health insurance premiums and out-of-pocket health care expenses (excluding long-term care) in retirement. The EBRI article presents estimates for people who supplement Medicare with a combination of individual health insurance through Plan F Medigap coverage and Medicare Part D for outpatient prescription-drug coverage. For each source of supplemental coverage, the model simulates 100,000 observations to allow for the uncertainty related to individual mortality and rates of return on assets in retirement, and computes the present value of the savings needed to cover health insurance premiums and out-of-pocket expenses in retirement at age 65.
From those observations, the analysis determined asset targets for having adequate savings to cover retiree health costs 50%, 75% and 90% of the time, both for individuals [2. Separate estimates are presented for men, women and married couples. Since women have longer life expectancies than men, women will generally have larger expenses than men to cover health insurance premiums and health care expenses in retirement, regardless of the savings target.] and for a stylized couple, both of whom are assumed to retire simultaneously at age 65. [3. Our analysis found a 1%-2% reduction in needed savings among individuals with median drug use and 4%-5% reductions in needed savings among individuals at the 90th percentile in drug use since EBRI’s 2011 analysis (see “Savings Needed for Health Expenses for People Eligible for Medicare: Some Rare Good News”).]
Specifically, a 65-year-old man would need $70,000 in savings and a woman would need $93,000 in 2012 if each had a goal of having a 50% chance of having enough money saved to cover health care expenses (excluding long term care) in retirement. A 65-year-old couple, both with median drug expenses, would need $163,000 in 2012 to have a 50% chance of having enough money to cover health care expenses (excluding long-term care) in retirement. To offer a bit of perspective, that couple would need $227,000 to have a 75% chance of covering those expenses, and $283,000 to have a 90% chance of doing so.
Of course, some will need more money than the amounts cited in the report, which did not factor in either the savings needed to cover long-term care expenses or the reality that many individuals retire prior to becoming eligible for Medicare. And some will need to save less than projected if they choose to work during retirement.
Still, as hard as it can be to hit a moving target, it’s even harder to hit a target you can’t see.
