Since Medicare and private insurance plans seldom fully cover the costs of medical care for retirees, individuals and couples planning for retirement should factor in the costs of medical care in determining the amount they need to save, a study on health expenses in retirement published by the Employee Benefit Research Institute (EBRI) recommended.
The study, “Savings Medicare Beneficiaries Need for Health Expenses: Some Couples Could Need as Much as $370,000, Up from $350,000 in 2016,” was published in the December 20, 2017, issue of EBRI Notes. The article examined the amount of savings Medicare beneficiaries are projected to need to cover program premiums, deductibles, and certain other health expenses in retirement. Specifically, the study looked at the projected costs associated with premiums for Medicare Parts B and D, premiums for Medigap Plan F, and out-of-pocket spending for outpatient prescription drugs.
The data used in the analysis came from a variety of sources, including the 2017 Medicare trustees report. The data were entered into a Monte Carlo simulation model that simulated 100,000 observations, allowing for the uncertainty related to individual mortality and rates of return on assets in retirement.
The results showed that in 2017, a 65-year-old man needs $73,000 in savings and a 65-year-old woman needs $95,000 in savings if the goal is to have a 50% chance of having enough savings to cover premiums and median prescription drug expenses in retirement. If, however, the goal is to have a 90% chance of having enough savings to cover these costs, the man needs to save $131,000 and the woman needs to save $147,000.
The findings further indicated that in 2017, a 65-year-old couple with median prescription drug expenses need $169,000 in savings to meet the goal of having a 50% chance of having enough savings to cover health care expenses in retirement. If, however, the couple aim to have a 90% chance of having enough savings to cover these expenses, they need savings of $273,000. In addition, the study found that a 65-year-old couple with drug expenses at the 90th percentile throughout retirement, and who want to have a 90% chance of having enough money for health care expenses, need to have $368,000 in savings.
The study also looked at shifts in savings targets in recent years. The findings indicated that projected savings targets increased between 1% and 6% from 2016 to 2017, after decreasing from 2011 to 2014 and then increasing from 2014 to 2016. The authors pointed out that despite the increase in savings targets since 2014, the 2017 savings targets were lower than the savings targets in 2012 almost across the board.
In addition, the authors emphasized that many workers should be saving more for health expenses than the amounts cited in this report, as the analysis did not factor in the total savings needed to cover long-term care expenses and other health expenses not covered by Medicare, or the fact that many individuals retire before becoming eligible for Medicare. The researchers also observed, however, that workers may need to save less than the estimated amounts if they choose to work past age 65 and continue to receive health benefits as active workers, thereby postponing enrollment in Medicare Parts B and D.
From Benefit Trends Newsletter, Volume 61, Issue 1
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