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Medicare Recipients, Get Ready for Higher Costs: EBRI

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What You Need to Know

  • An EBRI study of health care savings needs in retirement showed a 3% to 8% increase in 2021 from 2020.
  • Key reasons for the increase include increasing Medicare Part D costs and a rise in Medicare Part B premiums.
  • Typically, Medicare covers only about two-thirds of health care service costs, according to EBRI.

An annual estimate of how much money a 65-year-old Medicare beneficiary should have in savings to cover health care costs in retirement surged in 2021, according to the Employee Benefit Research Institute.

The predicted health savings targets were 3% to 8% higher for 65-year-olds retiring in 2021 than for those retiring in 2020, a new study released Thursday by the EBRI found. Expenses included health premiums, deductibles and other largely out-of-pocket costs.

This is nearly the largest increase since 2012. The reasons, the EBRI said, were due to the Medicare trustees increasing projected costs for Medicare Part D out-of-pocket expenses as well as the substantial increase in the Medicare Part B premium.

In 2022, the cost-of-living adjustment for Social Security beneficiaries is 5.9%.

The EBRI used a Monte Carlo simulation, allowing for uncertainty related to individual mortality and rates of return on assets in retirement.

Findings include:

  • In 2021, a 65-year-old man needed $79,000 in savings and a 65-year-old woman needed $103,000 in savings for a 50% chance of having enough to cover premiums and median prescription drug expenses in retirement, the study reported. For a 90% chance of having enough savings, the man needed $142,000 and the woman needed $159,000. This is up 9% from 2020.
  • For a 50% chance of being able to cover health care expenses in retirement, a couple with median prescription drug expenses needed $182,000 in savings. For a 90% chance of having enough, they needed $296,000. This is up 10% from 2020, the study states.
  • A couple with drug expenses at the 90th percentile throughout retirement who want a 90% chance of having enough money for health care expenses in retirement by age 65 would have a savings target of $361,000, up from $325,000 in 2020, the study says.

The study also noted: “As of 2019, Medicare covered 59 percent of the cost of health care services for Medicare beneficiaries ages 65 and older, while out-of-pocket spending accounted for 13 percent of incurred costs, and private insurance covered 18 percent.”

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Individuals will probably continue to pay a greater share of their overall health costs in retirement because of the financial condition of the Medicare program and cutbacks to employment-based retiree health programs, the study added.

“This analysis does not factor in the total savings needed to cover long-term care expenses and other health expenses not covered by Medicare, nor does it consider the fact that many individuals retire before becoming eligible for Medicare,” said Paul Fronstin, director of EBRI’s Health Research and Education Program and co-author of the report.

The study concluded: “After declining in 2020, projected health care costs for Medicare beneficiaries are expected to rise again. Thus, individuals should be concerned about saving for health insurance premiums and out-of-pocket expenses in retirement.

”Medicare generally covers only about two-thirds of the cost of health care services for Medicare beneficiaries ages 65 and older, while out-of-pocket spending accounts for 12 percent. Furthermore, the percentage of private-sector establishments offering retiree health benefits has been falling. This is also true in the public sector. “

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