The Employee Benefit Research Institute (EBRI) is out with its latest projections on the amount of savings that Medicare beneficiaries may need for health care expenses in retirement—and it’s a doozy.
According to EBRI’s research, some couples—in extreme cases—could need as much as $413,000 to have a 90% chance of having enough money to cover their health care costs in retirement. This would involve, for example, a couple with particularly high prescription drug expenditures.
Overall, the $413,000 predicted savings target for Medicare beneficiaries to cover premiums, deductibles and prescription drugs in retirement in 2023 represents an increase from the $383,000 savings target the previous year.
To have a 90% chance of meeting their health care spending needs in retirement, a man will need to have saved $184,000, and a woman will need to have saved $217,000, EBRI’s report shows. Couples enrolled in a Medigap plan with average premiums, meanwhile, will need to have saved $351,000 to have a 90% chance of covering their medical expenditures in retirement.
Whether facing a future with a minimum- or maximum-level of expenses, the findings should serve as a wake-up call for individuals saving for retirement.
“Health care costs in retirement can be considerable and may not necessarily be a salient issue for workers,” observed Jake Spiegel, research associate for Health and Wealth Benefits Research at EBRI.
To project how much Medicare beneficiaries may need to save to have a reasonable chance of meeting their health care spending requirements in retirement, EBRI built a simulation model allowing for uncertainty due to mortality and rates of return on assets in retirement. This model incorporates recent changes to Medicare Part D enacted by the Inflation Reduction Act of 2022 and tests varying assumptions about Medicare Advantage and Medigap plans that Medicare beneficiaries may purchase. The output of this updated simulation model is the basis of this new report.
Medicare Advantage
Although there is significant individual-level variation, enrollees in Medicare Advantage plans generally have lower savings targets, the report notes.
For instance, a man enrolled in Medicare Advantage who has median drug expenditures and is an average user of health care services will need to have saved $99,000 to have a 90% chance of meeting his health care spending requirements in retirement. In contrast, a woman will need to have saved $116,000 to have a 90% chance of having enough to cover her health care costs in retirement.
Couples with median drug expenses would need to have saved $189,000 to have a 90% chance of covering their health care expenditures in retirement. If they had maximum drug expenses, they would then need $250,000 to have a 90% chance of covering their expenses.
EBRI notes that the savings estimates for Medicare Advantage enrollees with average use of health care services are between 34% and 47% lower than they are for enrollees in the traditional Medicare program who pay an average premium for Medigap Plan G supplemental coverage. However, high users of health care need 22% lower savings if they choose a Medicare Advantage plan over traditional Medicare.
Of course, there are tradeoffs to consider, the report further emphasizes. Medicare Advantage plans, for example, often have limited networks or may require approval before certain medications or services are covered.
“The results from EBRI’s projection model indicate that basic health care costs incurred by Medicare beneficiaries are high. While the savings targets tend to be lower for Medicare Advantage enrollees relative to Medigap enrollees, there are important limitations to take into account,” added Spiegel.
As for the sources of payment, Medicare prescription drug enrollees in 2024 will continue to pay 25% of the cost of prescription drugs when they are in the “donut hole” for both generic and brand-name drugs, though other forms of cost sharing have increased, EBRI notes.
However, starting in 2025, Medicare Part D out-of-pocket spending will be capped at $2,000 because of a provision in the Inflation Reduction Act of 2022. Overall, as of 2021, Medicare covered 61% of the cost of health care services for Medicare beneficiaries ages 65 and older, while out-of-pocket spending accounted for 12% of incurred costs, and private insurance covered 18%.
Still, “despite the introduction of the cap on Part D out-of-pocket spending, individuals may have to pay greater shares of their overall health costs in retirement because of the financial condition of the Medicare program and cutbacks to employment-based retiree health programs,” EBRI’s report further warns.
A summary of EBRI’s “Projected Savings Medicare Beneficiaries Need for Health Expenses Increased Again in 2023” can be viewed here.
