Retirees Have Limited Control Over Health Care Inflation

A new analysis out from the Employee Benefit Research Institute (EBRI) suggests projected savings targets needed to cover health care in retirement went up last year, after several years of decline.

Health care cost projections for retirees indicate major challenges ahead, EBRI explains, but they are actually generally lower than they were five years ago.

“While there are various factors at play, the main reason for the increase in needed savings is related to the yearly adjustment for out-of-pocket spending for prescription drug use,” observes Paul Fronstin, director of EBRI’s Health Research and Education Program and co-author of the annual health savings analysis. “Because actual out-of-pocket spending for prescription drugs in the most recent data turned out to be higher, future estimates have gone up.”

EBRI warns that its analysis does not factor in the savings needed to cover such things as long-term care expenses, retirement earlier than becoming eligible for Medicare, and higher Medicare premiums related to higher income. Thus, “many individuals will need more than the amounts cited in this report,” Fronstin suggests.

“Some workers will actually need to save less than what is reported if they choose to work past age 65, thereby postponing enrollment in Medicare if they receive health benefits as active workers,” he adds. “The range of increases depends on how much health expenses a person is likely to have and how high a probability they want to have enough money on hand … Specifically, EBRI found, 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.”

NEXT: More from the EBRI analysis 

EBRI finds that to have a 90% chance of having enough savings, the man would need $127,000 and the woman would need $143,000.

“Not surprisingly, those with high prescription drug costs would need to save substantially more,” Fronstin says. “For a married couple both with drug expenses at the 90th percentile throughout retirement who want 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.”

As Fronstin explains, the EBRI analysis updates previous estimates on savings needed to cover health insurance premiums and health care expenses in retirement: “As before, it points out that projections of savings needed to cover out-of-pocket expenses for prescription drugs are highly dependent on the assumptions used for drug utilization, which is why the analysis provides [a range of estimates].”

Fronstin further observes that “Medicare was never designed to cover health care expenses in full … In 2013, Medicare covered 62% of the cost of health care services for Medicare beneficiaries ages 65 and older, while out-of-pocket spending accounted for 13%, and private insurance covered 13%.”

The full report, “Savings Medicare Beneficiaries Need for Health Expenses: Some Couples Could Need as Much as $350,000,” is published in the Feb. 1, 2017 EBRI Notes, online at www.ebri.org.