Bulletin
Investor Alert

Robert Powell

May 29, 2017, 9:48 a.m. EDT

You might need nearly $350,000 to pay for health-care costs in retirement

How to get real — and get smart — about your health in retirement

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

or Cancel Already have a watchlist? Log In


By Robert Powell, MarketWatch


Shutterstock
It’s important to be educated and financially prepared for potential health-care expenses down the road.

With apologies to Augusten Burroughs, we have to revise his quote : When you have your health, your health-care costs in retirement will be high. And when you do not have your health, those costs will be even higher.

Consider the findings from a report just published by the Employee Benefit Research Institute (EBRI) which examined the amount of savings Medicare beneficiaries are projected to need to cover program deductibles, premiums and other health expenses in retirement.

• In 2016, a 65-year-old man would need $72,000 in savings and a 65-year-old woman would need $93,000 if each had a goal of having a 50% chance of having enough savings to cover health-care expenses in retirement. If they wanted a 90% chance of having enough savings, the man would need $127,000 and the woman would need $143,000.

• A couple with median prescription drug expenses would need $165,000 if they had a goal of having a 50% chance of having enough savings to cover health-care expenses in retirement. If they wanted a 90% chance of having enough savings, they would need $265,000.

• For a couple with drug expenses at the 90th percentile throughout retirement who wanted a 90% chance of having enough money saved for health-care expenses in retirement by age 65, targeted savings would be $349,000 in 2016.

Of note, EBRI provides a range of savings targets while other organizations typically publish just the average savings target. In August, for instance, Fidelity Benefits Consulting estimated that a 65-year-old couple retiring in 2016 would have needed an average of $260,000 (in today’s dollars) to cover medical expenses throughout retirement, up from $245,000 in 2015, and upward of $400,000 if you include long-term care expenses.

Read: Retiree health costs rise.

Two more items to note:

One, EBRI’s savings targets represent the present value of projected stream of expenditures over the course of a couple’s retirement. For instance, imagine spending $10,000 a year adjusted for inflation for 20 years on health-care expenses. The present value of that stream represents how much you would need set aside today to pay for all those expenses in the future.

Two, most retirees don’t have $165,000 to $349,000 set aside to pay just for health-care expenses in retirement. For instance, a person in their 60s who’s been contributing to a 401(k) for 30-plus years has on average nearly $275,000 in their account, an amount typically earmarked for all expenses in retirement. Given that, retirees typically pay for health care using current income, be it Social Security, pensions, earned income, and retirement account distributions. And when viewed as annual expense, those health-care costs seem somewhat manageable given the current spending patterns of older Americans. The average 65-74-year-old household spent $5,956 on health care in 2014, and the average 75-year-old and older household spent $5,708, according to a recent report from the Bureau of Labor Statistics.

Still, the authors of EBRI’s report, Paul Fronstin, the director of health research and education program at EBRI, and Jack VanDerhei, the director of research at EBRI, note that “individuals should be concerned about saving for health insurance premiums and out-of-pocket expenses in retirement for a number of reasons. Medicare generally covers only about 62% of the cost of health-care services for Medicare beneficiaries ages 65 and older, while out-of-pocket spending accounts for 13%.”

What’s more, Fronstin and VanDerhei wrote that “many individuals are likely to need more than the amounts cited” because their analysis didn’t factor in the savings needed to cover long-term care expenses and other expenses not covered by Medicare, such as dental care.

Nor did their analysis take into account the fact that many individuals retire prior to becoming eligible for Medicare. And, it doesn’t factor in the possibility that policymakers will begin to “realistically address financial issues in the Medicare program with solutions that may shift more responsibility for health-care costs to Medicare beneficiaries.”

Read: Savings Medicare Beneficiaries Need for Health Expenses: Some Couples Could Need as Much as $350,000

So, what might those saving for or living in retirement do to pay for health-care costs in retirement?

Get real

Plan for future health-care costs in retirement. But plan too for something entirely different to happen as well. “We can estimate health-care expenses in retirement, but it is all a fallacy because we cannot reliably predict the future of health care or drug costs,” says Carolyn McClanahan, a certified financial planner with Life Planning Partners. “What will happen if (President Donald) Trump takes the pharmaceuticals down a peg and costs come down — the numbers will adjust lower next year. What happens if Democrats come back into power and we get a single payer system? Did we make people over-save?”

McClanahan also said it’s “overwhelming and wrong to say to people, ‘You might need to be on expensive prescriptions so you need to set aside $350,000 for health-care expenses in retirement.’”

One, people who are on many drugs likely won’t live a very long life. And two, “making them use ‘worry minutes’ over this may decrease their life span,” McClanahan said.

Get smart

You might not be able to predict with a high degree of certainty your future health-care costs, but there is much you can do take the worry out of paying for those costs. For one, you ought to do all you can to stay healthy by eating right and exercising. You should also be saving as much as possible and in the right accounts for all your expenses in retirement, not just health care.

Read: How to pick the right way to save for retirement.

“There are many opportunities for current and pre-retirees to take proactive steps to become educated and financially prepared for potential health-care expenses down the road,” said Cyndi Hutchins, Director of Financial Gerontology at Merrill Lynch.

Page 1 Page 2
This Story has 0 Comments
Be the first to comment
More News In
Retirement

Story Conversation

Commenting FAQs »

Partner Center

Featured Commentary »

Link to MarketWatch's Slice.