Some Medicare beneficiaries may need to have hundreds of thousands of dollars saved to cover health care costs in retirement, according to a recent report from the Employee Benefit Research Institute. For couples with particularly high prescription drug expenditures, the amount could approach $500,000.
The findings come as retiree health coverage is becoming less common among private-sector employers, shifting more responsibility for health care costs onto workers and retirees.
"Health care costs remain a major financial challenge in retirement, even for people covered by Medicare," Paul Fronstin, EBRI's director of health benefits research, said in a statement.
"While the new Medicare Part D out-of-pocket cap offers important financial protection, our analysis shows many retirees will still need significant savings to have a reasonable chance of covering health care expenses throughout retirement."
Medicare was not designed, the report emphasizes, to cover all health care expenses in retirement.
"Retirees and workers nearing retirement should not assume Medicare will fully shield them from potentially high health care costs," Jake Spiegel, an EBRI senior research associate, said in the statement.
"These findings highlight the importance of planning ahead and understanding the trade-offs among coverage options, including differences in premiums, out-of-pocket costs and access to care."
EBRI Analysis
To project how much Medicare beneficiaries may need to save to have a reasonable chance of meeting their health care spending requirements in retirement, EBRI built a simulation model that allows for uncertainty due to mortality and investment returns.
The model reflects the Inflation Reduction Act's $2,000 cap on Part D out-of-pocket spending in 2025 and varying assumptions about Medicare Advantage and Medigap coverage.
EBRI said the savings targets in its analysis may underestimate total retirement health care needs because they do not include long-term care expenses or costs for services that are not generally covered by Medicare, such as dental and vision care.
The predicted savings target increased slightly from 2025 for Medicare beneficiaries enrolled in Medigap Plan G, the analysis showed, and remains sensitive to assumptions about premiums, drug costs and health care use.
A 65-year-old man enrolled in a Medigap plan with average premiums will need to have saved $120,000 to have a 50% chance of being able to cover premiums and median prescription drug expenditures. A woman of the same age will need to have saved $146,000.
To have a 90% chance of meeting their health care spending needs in retirement, a man will need to have saved $212,000, and a woman $252,000.
Meanwhile, couples enrolled in a Medigap plan with average premiums will need to have set aside $267,000 to have a 50% chance of covering their medical expenditures in retirement, and $405,000 to have a 90% chance.
In an extreme case, a couple with high prescription drug expenditures would need $469,000 to have a 90% chance of having enough money to cover health care costs in retirement.
Medicare Advantage
Although significant individual-level variation exists, enrollees in Medicare Advantage plans generally have lower savings targets, according to the EBRI report.
A man enrolled in Medicare Advantage who has median drug expenditures and an average use of health care services will need to have saved $61,000 to have a 50% chance of meeting his health care spending requirements in retirement, and he would need $106,000 to have a 90% chance.
For a woman, those amounts rise to $74,000 and $125,000.
Couples enrolled in Medicare Advantage will need to have saved $135,000 to have a 50% chance and $203,000 to have a 90% chance of covering their health care expenditures in retirement.
Other factors also influence the choice between Medicare Advantage and traditional Medicare, EBRI noted. The former often have limited networks or may require approval before certain medications or services are covered.
Credit: Shutterstock
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.