These days, there's one milestone birthday plenty of people look forward to: the one when they become eligible for Medicare and can leave all their healthcare worries behind. That's the hope, anyway. But the reality is that turning 65 takes care of only a little more than half of subsequent medical expenses. Now a new study from the Employee Benefit Research Institute shows that a couple without employer-sponsored retiree coverage can expect to need anywhere from $194,000 to $635,000 to cover healthcare premiums and out-of-pocket costs during retirement.
To arrive at their figures, researchers developed a model that took into account numerous mortality and investment risk scenarios, different sources of healthcare coverage, and different healthcare needs.
Because they live longer, women can always expect to need more savings to cover their costs than men. So, for example, a typical 65-year-old woman with average drug expenses during retirement might expect to need $108,000 for her Medicare and Medigap premiums and out-of-pocket expenses, whereas a similarly situated man would need $79,000. People with higher drug expenses? The same woman would need $217,000 if her drug costs were at the top of the range, while the man would need $156,000. In general, people with retiree healthcare coverage, especially those whose former employers help pay their premiums, would have lower costs. (However, the proportion of employers that provide retiree healthcare has been declining for years, so that now only about 1 in 5 Medicare-age retirees receives it.)
Of course, how much people will need to cover health costs begs the question of how much they actually have. Jack VanDerhei, one of the study coauthors, was good enough to run some numbers for me, and they're not pretty. Our hypothetical woman with average drug costs would have to pay 58 percent of her retirement and Social Security income out every year in premiums and out-of-pocket medical expenses if she were in the lowest income quartile, or 11 percent annually if she were in the top quartile. For our hypothetical man, the corresponding figures are 43 percent and 8 percent. With high drug costs, the bite is much more painful: The woman, for example, could expect to need 117 percent of her yearly income for medical expenses in the lowest quartile and 22 percent in the top.
The wild card in all of this, and the reason it didn't make sense to model the expected costs for younger people, is uncertainty over how the Medicare program will be altered in coming years to address funding shortfalls. "The program is likely to change drastically," says Paul Fronstin, director of EBRI's Health Research and Education Program and the report's coauthor, noting that without changes in benefits or taxes the Medicare trust fund will become insolvent in 2019. The bottom line, though, is that costs are likely to take an even bigger bite out of seniors' limited incomes in coming years.
There are no easy fixes for people who are worried that they won't have enough, say financial planners. Many people who might have retired in their mid-50s are choosing to delay retirement so as to hang onto their health insurance. Some are considering long-term care insurance. (I've written about some of the potential pitfalls of this type of insurance in the past.) Health savings accounts linked to high-deductible health plans are another option. They allow people to accumulate money tax free to cover their healthcare expenses in retirement. But HSA's and high-deductible plans arent for everyone, particularly those with chronic medical conditions.
The key is to set up a dedicated fund to save for healthcare expenses in retirement, says Stephen Lovell, a financial adviser with Forsyth Heritage in Walnut Creek, Ca., just as you would if you were saving for your kids' college educations. The account can take many forms: a variable annuity, a regular brokerage account, Roth IRA, an HSA (though contribution limits for both Roth IRAs and HSAs mean you can't rely solely on them). Too many opt for the ostrich approach: "Lots of people assume that because it's a big problem maybe the government will just fix it for them," says Lovell. Talk about a bird-brained solution.
What are you doing to save up for healthcare expenses once you retire?