New research shows that the savings needed to cover health expenses in retirement have declined for the first time in several years, but that’s no reason to relax.
The study by the Employee Benefit Research Institute (EBRI) finds an 8% decline in the amount of savings that a 65-year-old man needs and a 9% decline in the amount that a 65-year-old woman needs in order to have a 50/50 chance of sufficiently covering medical premiums and median prescription drug expenses in retirement.
The decline is even greater at the 90th percentile, where in 2020 both men and women need 10% less than in 2019. EBRI notes that these are the biggest declines it has seen since 2013, when needed savings declined between 6% and 11%.
The report, “A Bit of Good News During the Pandemic: Savings Medicare Beneficiaries Need for Health Expenses Decreases in 2020,” updates previous estimates by EBRI examining the savings needed to pay for premiums for Medicare Parts B and D and Medigap Plan G, as well as out-of-pocket spending for outpatient prescription drugs. EBRI notes that Medicare generally covers only about two-thirds of the cost of health care services for Medicare beneficiaries ages 65 and older.
Still Significant
Despite the positive findings, the amount of savings needed for these expenses is still substantial. For a 90% chance of having enough savings to cover premiums and median prescription drug expenses in retirement, a 65-year-old man in 2020 needs $130,000 and a 65-year-old woman needs $146,000. For a 50% chance of covering these expenses in 2020, the man would need $73,000 and the woman would need $95,000.
EBRI notes that, because women have longer life expectancies than men, women will generally need larger savings than men to cover health insurance premiums and health care expenses in retirement regardless of the savings targets.
The overall projected savings needed to have a 90% chance of having enough money to pay for premiums, Part B deductibles and out-of-pocket drug expenses for retirement at age 65 in 2020 for a couple with drug expenses at the 90th percentile is $325,000. While this is still a substantial amount, note that it is down from $363,000 in 2019 and $399,000 in 2018.
The main reason for the decrease in needed savings from 2019 to 2020 is related to the adjustment made each year to reestablish the baseline for out-of-pocket spending associated with prescription drug use, according to the report’s coauthors, Paul Fronstin, Director of the Health Research and Education Program at EBRI, and Jack VanDerhei, Director of Research at EBRI. Additionally, they note that the Medicare Trustees reduced projected costs for Medicare Part D premiums and out-of-pocket expenses.
For example, the report explains that in the 2019 trustees report, the monthly Medicare Part D premium was projected to be $51.37 in 2028. In the 2020 report, it was projected to be $44.79 or 13% lower. Similarly, the 2028 Part D deductible projection was $615 in the 2020 report, down from $670 in the 2019 report, an 8% reduction.
“Americans should consider that even with this decline, the amount needed to supplement Medicare is still significant, and that they will likely need more savings than cited in this report,” explains Fronstin. In addition to the costs cited in the report, there are the potential costs associated with long-term care and other expenses not covered by Medicare, he notes. The analysis also does not take into account the fact that many individuals retire before becoming eligible for Medicare.
Moreover, the report cautions that issues surrounding retirement income security “are certain to become an even greater challenge” as policymakers begin to address financial issues in the Medicare program with solutions that may shift more costs to Medicare beneficiaries.
The data used in the analysis come from a variety of sources, including a Monte Carlo simulation model EBRI employed that simulated 100,000 observations, allowing for the uncertainty related to individual mortality and rates of return on assets in retirement.
