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Now You Need Even More Money for Health Care in Retirement: EBRI

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The Employee Benefit Research Institute increased its projections for how much retirees will need to save to pay for health care in retirement. In an EBRI Notes article released in late January, the organization found that a 65-year-old couple may need nearly $350,000 to have a 90% chance of covering their health care expenses in retirement.

Prescription costs are the key factor in determining how much a person needs to save for retirement health care. A 65-year-old man paying median prescription drug costs needs $127,000 to meet that 90% target, EBRI found, while a 65-year-old woman needs $143,000. A married couple needs $265,000. Those targets are each up 2% from last year.

(Related: Financial Planning for Unmarried Couples: A Tricky Challenge)

If drug costs go up to the 75th percentile, a 65-year-old man would need $139,000 and a woman would need $156,000. A married couple should have $289,000 saved, according to EBRI. Those targets are up less than 1%, with no change in the savings target for women.

In the 90th percentile for prescription drug costs, savings targets increase to $168,000 for men, $187,000 for women and $349,000 for couples.

Couples that are willing to gamble on a 50% chance of running out of savings have a target range of between $165,000 and $221,000, depending on their prescription costs. Men need to save between $72,000 and $97,000 for a 50% chance of success; women need to save between $93,000 and $124,000.

EBRI also pointed out that a specific savings goal for health care in retirement is a moving target. It depends on when someone retires; how long he or she will live after that, and how healthy he or she is; the availability and source of supplemental coverage; the increase in the cost of health care; and interest rates and returns on other investments.

“In addition, public policy that changes any of the above factors will also affect spending on health care in retirement,” according to EBRI. “While it is possible to come up with a single number that an individual can use to set retirement savings goals, a number based on averages will be too small for approximately one-half of the population.”

Health care expenses in the report include Medicare premiums and out-of-pocket costs on medication. EBRI assumed beneficiaries have supplemental insurance and pay premiums on a regular basis.

After declining between 2011 and 2014, EBRI’s projected savings targets have increased in the last two years, and are up between 0% and 6% from 2015, according to the report. Even so, they haven’t reached the levels identified in 2012. The main reason for that, according to EBRI, is a new baseline for out-of-pocket prescription costs established in 2013.

The increase was offset by other changes, EBRI noted. Growth projections for premium and health care costs by the Congressional Budget Office and the Centers for Medicare and Medicaid Services, on which EBRI’s analysis is based, have slowed.

“It is important to note that many individuals are likely to need more than the amounts cited in this report,” EBRI noted. “This analysis does not factor in the savings needed to cover long-term care expenses and other expenses not covered by Medicare, nor does it take into account the fact that many individuals retire prior to becoming eligible for Medicare.”

To get the savings targets outlined above, EBRI assumed health care savings at age 65 would be invested and spent gradually, and would earn a 7.32% median return. It also assumed couples were opposite-sex, and both partners would retire simultaneously at age 65.

— Read How to Minimize Pricey Medicare Surcharges on ThinkAdvisor. 


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