Rx Expenses Driving Post-Retirement Costs Higher

Better reset those post-retirement income savings targets, as expenses to cover health care in retirement are moving higher after several years of decline, driven by prescription drug costs.

According to new research by the nonpartisan Employee Benefit Research Institute (EBRI), the range of retiree health savings targets rose between 6% and 21% from 2014 to 2015, following declines in 2012-2014. Because actual out-of-pocket spending for prescription drugs in the most recent data turned out to be higher than expected, future estimates have gone up.

Worse, since the 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, the researchers acknowledged that “many individuals will need more than the amounts cited in this report.”

On the other hand, those who choose (or are able) to work past age 65, might require less by postponing enrollment in Medicare C (particularly if they receive health benefits as active workers).

As is often the case in such matters (and unlike some of the widely cited “averages” touted by some reports), EBRI acknowledges that 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. For example, while most individuals would likely opt for 100% certainty in such matters, EBRI notes that, in 2015, a 65-year-old man would need $68,000 in savings and a 65-year-old woman would need $89,000 if each has a goal of having a 50/50 chance of having enough money saved to cover health care expenses in retirement. If, however, either instead wanted a 90% chance of having enough savings, $124,000 is needed for a man and $140,000 is needed for a woman.

Those with high prescription drug costs would need to save substantially more: A married couple, both with drug expenses at the 90th percentile throughout retirement who wanted to have a 90% chance of having enough money saved for health care expenses in retirement by age 65 would now need $392,000, compared with an estimated $326,000 in 2014.

Last year’s analysis by EBRI found that retiree health savings targets declined between 2% and 10% from 2013 to 2014, due in part to enhanced prescription drug coverage provided by the Patient Protection and Affordable Care Act (PPACA).

Medicare was not designed to cover all health care expenses. In 2012, it covered 60% 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 15%.

The full report, “Amount of Savings Needed for Health Expenses for People Eligible for Medicare: Unlike the Last Few Years, the News Is Not Good,” is available at http://www.ebri.org/pdf/notespdf/EBRI_Notes_10_Oct15_HlthSvgs_DB-DC.pdf.

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