This paper examines the cost of health insurance and health care expenses in retirement. It examines recent trends in private- and public-sector retiree health benefits and the impact of these trends on current and future retirees. It also presents options that retirees currently have to supplement the Medicare program, and provides estimates of how much those options will cost current and future retirees.
This paper examines the savings needed to cover health insurance premiums and out-of-pocket expenses for health care services in retirement and evaluates the use of health savings accounts (HSAs) to save for those expenses. Proponents of HSAs often tout them as a vehicle for funding future retiree health care costs. But, while HSAs represent an important option for consumers seeking more control over their health care spending, statutory contribution limits make it unlikely that these accounts will play more than a minor part in savings for health care costs in retirement. This research shows that while HSAs can be used to save for health care expenses in retirement, the maximum savings that can be accumulated in an HSA will be far from sufficient to fully cover the savings needed in retirement for insurance premiums and out-of-pocket expenses. One of the difficulties in using an HSA to save money for premiums and out-of-pocket expenses during retirement is that individuals also can (and may need to) use the money in the account to pay for health care services during their working years or to pay COBRA premiums and insurance premiums during periods of unemployment. The PDF for the above title, published in the August 2008 issue of EBRI Notes, also contains the fulltext of another August 2008 EBRI Notes article abstracted on SSRN: quot;The Impact of Immigration on Health Insurance Coverage in the United States, 1994-2006.quot.
The new Medicare drug law that was enacted in late 2003 makes two changes that supporters of the law say should make it easier for today's workers to prepare to pay the medical bills they will confront in retirement: prescription drug benefits (the new Medicare Part D) and health savings accounts (HSAs). This paper examines the impact of Medicare Part D on savings needed for insurance premiums to supplement Medicare, Medicare Part B and D premiums, and out-of-pocket expenses in retirement, and examines the viability of using HSAs to save for these expenses. It presents a wide range of estimates based on various ages at the time of death, because longevity risk is a major threat to retirement income security. This range of estimates also varies with various assumptions regarding health insurance premium inflation rates and out-of-pocket expenses. Projecting the amount needed for medical expenses in retirement is tentative and complex because it requires conclusions about the range by which medical inflation will exceed consumer prices generally, as well as assumptions about whether medical practices will change in a way that makes Medicare coverage for a given ailment more or less likely.
This paper updates previous estimates by the Employee Benefit Research Institute on savings needed to cover health insurance premiums and health care expenses in retirement. Much like EBRI's 2012 report, this analysis finds that the savings targets for a 65-year-old retiring in 2013 were not higher than the savings targets for a 65-year-old in the previous year. In fact, these particular savings targets have continued to fall, with the decline ranging from 6-11 percent. This report discusses the model, the savings targets, and continued reasons for the decline in savings targets. In 2010, Medicare covered 62 percent of the cost of health care services for Medicare beneficiaries age 65 and older, while out-of-pocket spending accounted for 12 percent, and private insurance covered 13 percent. Individuals can expect to pay a greater share of their costs out-of-pocket in the future because of the combination of the financial condition of the Medicare program and cutbacks to employment-based retiree health programs. 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 post-65 when examining needed savings regardless of the savings targets. In 2013, a man would need $65,000 in savings and a woman would need $86,000 if each had a goal of having a 50 percent chance of having enough money saved to cover health care expenses in retirement. If either instead wanted a 90 percent chance of having enough savings, $122,000 would be needed for a man and $139,000 would be needed for a woman. Savings targets declined between 6 percent and 11 percent between 2012 and 2013 for a person or couple age 65. For a married couple both with drug expenses at the 90th percentile throughout retirement who wanted a 90 percent chance of having enough money saved for health care expenses in retirement by age 65, targeted savings fell from $387,000 in 2012 to $360,000 in 2013. The PDF for the above title, published in the October 2013 issue of EBRI Notes, also contains the fulltext of another October 2013 EBRI Notes article abstracted on SSRN: “IRA Asset Allocation, 2011.”
This paper provides estimates for savings needed to cover health insurance to supplement Medicare and out-of-pocket expenses for health care services in retirement. Medicare generally covers only about 60 percent of the cost of health care services (not including long-term care) for Medicare beneficiaries ages 65 and older, while out-of-pocket spending accounts for 13 percent. The Patient Protection and Affordable Care Act (PPACA) reduces cost sharing in the Part D “donut hole” down to 25 percent by 2020. This year-to-year reduction in coinsurance will continue to reduce savings needed for health care expenses in retirement, all else equal, for individuals with the highest prescription drug use. EBRI analysis finds 1-2 percent reductions in needed savings among individuals with median drug use and 4-5 percent reductions in needed savings among individuals at the 90th percentile in drug use since EBRI's 2011 analysis. A 65-year-old man would need $70,000 in savings and a woman would need $93,000 in 2012 if each had a goal of having a 50 percent chance of having enough money saved to cover health care expenses (excluding long-term care) in retirement. A 65-year-old couple, both with median drug expenses, would need $163,000 in 2012 to have a 50 percent chance of having enough money to cover health care expenses (excluding long-term care) in retirement, $227,000 to have a 75 percent chance of covering those expenses, and $283,000 to have a 90 percent chance of doing so. These estimates are 1-2 percent lower than the savings targets estimated in 2011. Many individuals will need more money than the amounts cited in this report because this analysis does not factor in the savings needed to cover long-term care expenses, nor does it take into account the fact that many individuals retire prior to becoming eligible for Medicare. However, some workers will need to save less than what is reported if they choose to work during retirement, thereby postponing enrollment in Medicare Parts B and D if they receive health benefits as active workers. Finally, issues surrounding retirement income security are certain to become an even greater challenge in the future as employers continue to scale back retiree health benefits and as policymakers begin to address financial shortfalls in the Medicare program with solutions that are likely to shift more responsibility for health care costs to Medicare beneficiaries. The PDF for the above title, published in the October 2012 issue of EBRI Notes, also contains the fulltext of another October 2012 EBRI Notes article abstracted on SSRN: “IRA Asset Allocation, 2010.”
This Element is an excerpt from Work Wanted: Protect Your Retirement Plans in Uncertain Times (ISBN: 9780132354646) by James W. Walker and Linda H. Lewis. Available in print and digital formats. Be prepared: a realistic, indispensable new look at what you’ll really be spending when you retire. You are likely counting on pension, savings, and health programs from your employer to sustain you in retirement. Combined with personal savings and Social Security, you reasonably expect retirement to be enjoyable and secure. However, many people underestimate their financial needs and overestimate their prospective resources. You may need to take a fresh look at your financial situation....
