Benefits June 14, 2017

Reducing Health Care Costs Through Behavioral Modification

Minimal behavior change can significantly reduce the costs of health care in retirement and potentially allow employees to save more towards retirement, a study finds.

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Rising health care costs are projected to be the most burdensome expenses in retirement, but minimal behavioral change can significantly lower the price tag. These conclusions are from HealthView Services’ 2017 Retirement Health Care Costs Data Report, which draws from 70 million health care cases as well as actuarial, government and economic data.

According to a HealthView case study cited in the report, a 50-year-old with Type II diabetes who follows doctor’s orders can potentially add eight additional years to life expectancy and save an average of $5,000 annually in out-of-pocket costs before retirement. The firm notes that if the same individual invests that sum into a fund that earns a 6% return, that person would have more than $120,000 by age 65 or an extra $14,000 per year (assuming the person lives to the actuarial projected age of 80). With another $2,750 per year in health care savings in retirement, this individual would have generated almost $17,000 more in annual retirement income.

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These findings emphasize the importance of communicating effective benefits packages in order for employees to make the most out of the offerings most beneficial to them. Adding a health component to financial wellness programs or adopting programs that incentivize healthy behavior may help as well.

But participants who don’t address their health issues through behavior modification could be looking at a very expensive retirement, as could employers enduring higher health care costs.

According to HealthView, retirement health care cost inflation is expected to increase at an annual rate of 5.47% for the next decade. This translates to triple the rate of inflation between 2012 and 2016, and more than double the projected Social Security cost-of-living-adjustments (COLAs).

The study indicates that a healthy 65-year old couple retiring today is expected to need $321,994 to cover total health care costs in retirement, when factoring in projected expenses for Medicare Part B and D premiums, as well as supplemental and dental insurance. When accounting for deductibles, copays, hearing, vision, and cost sharing, that number jumps to $404,253 in today’s dollars or $607,662 in future dollars.

Medicare Part B premiums alone jumped by 16% in 2016. So far in 2017, they have increased by 10% despite a 24% decrease predicted by the Medicare Board of Trustees.

HealthView Services reports that the main driver behind these rising expenses is the increase in retirement health care inflation.

The report notes that “Through a short-term lens, the average 65-year-old couple that retires in 2017 will pay $11,369 in their first year for health care—$670 more than the same couple retiring in 2016. By age 85, those 2017 retirees will spend $39,208 (or $1,915 more for the same coverage than last year’s retirees).”

Women in particular may face a larger burden due to increased life expectancy. HealthView finds that women live on average two years longer than men. The firm projects that expected health care costs for a healthy 63-year-old woman retiring this year (living to age 89) would need $362,607 in future dollars or 29.9% more than a 65-year-old male.

But regardless of age or gender, the firm finds that minimal behavioral change can reduce health care expenses and boost savings as well as longevity.

“Although these numbers may seem out of reach, the savings required to cover health care when meeting retirement savings goals are often more modest than might be expected,” says HealthView President and CEO Ron Mastrogiovanni. “A 55-year-old can increase 401(k) contributions by as little as $17 per paycheck to address their retirement health care premiums, assuming a company match of 50% and they are meeting an 85% incomer replacement ratio savings goal.”

The full 2017 Retirement Health Care Costs Data Report can be found at HVSFinancial.com

Participants June 14, 2017

Plan Sponsors Can Correct Gender-Based Retirement Income Gap

Prudential research indicates that the retirement account balances of female employees are, on average, one-third lower than their male counterparts.

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Lower retirement account balances, coupled with lower average Social Security benefits and longer life expectancies, mean that women are projected to have much lower income to sustain them throughout retirement than men, according to new research from Prudential.

The analysis frankly lays out the challenges that women in the U.S. face when planning for retirement: Longer life expectancies; the likelihood that many will be single at some point during retirement; time constraints due to roles as workers (both paid and unpaid) and caretakers; lower earnings than men; greater debt at both Millennial and pre-retirement ages than prior generations.

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“Women have made significant advances over the last few decades in the workplace,” Prudential explains. “They currently comprise 47% of the U.S. workforce, and 40% of working women are in managerial and professional jobs, compared to just 18% in 1975. Despite these workplace advances, women continue to face a much greater challenge than men when it comes to retiring with lifetime financial security.”

The Prudential data shows fully 25% of women indicate that they don’t think they’ll ever be able to retire, compared to 14% of men. Experts warn that working well beyond the traditional retirement age is generally far less feasible than people anticipate.

When a significant percentage of the workforce isn’t retiring at an expected age, employees’ productivity and organizations’ ability to attract, promote, and retain new talent may be adversely impacted, Prudential warns. The analysis shows a one-year increase in the average retirement age for a given workforce results in an average annual incremental run rate of about 1% to 1.5% of workforce costs.

“This is about half the average annual employer cost of running a defined contribution plan,” researchers note.

Prudential argues that plan sponsors “increasingly have the ability to leverage data to determine when participants are facing important milestones in their lives. The ability to use data to fuel proactive engagement regarding key savings and planning opportunities can also help make closing the gap an achievable reality.”

NEXT: Minding the gap

Many of the data points shared by Prudential about this topic can help plan sponsors make practical adjustments to their plan designs. For example, the firm finds marriage patterns have changed over the last few decades, while divorce has become more prevalent. At the same time, more women are choosing to remain single. The result is that, when women reach retirement age, they are actually much less likely than men to be married. For those 65 and older, Prudential finds, 70% of men are married, compared to just 45% of women.

“This is an important consideration, as marital status is strongly linked to many aspects of financial security,” Prudential warns. “Divorced and single women are unable to capitalize on the resource pooling and economies of scale that come with a marriage or partnership. Widowhood also causes financial security challenges, as household income often drops more significantly than household expenses when a spouse dies.”

For plan sponsors, one clear indication of all this is that women (and men who are married, it should be said) should be urged to save even more for retirement than might otherwise be suggested. Plans also must be aware that the average woman working full-time earns 79% of the income earned by her male counterpart working full-time. This gap also holds true for lifetime earnings, “and is exacerbated when a woman steps out of the workforce or reduces her work schedule to prioritize caretaking duties.”

“Since Social Security benefits are based on career earnings, women’s Social Security benefits also tend to be lower,” Prudential warns. “Further, when women take time out of the workforce, they limit their opportunity to invest in their workplace retirement plan.”

Prudential suggests that plan design solutions like auto-enrollment and automatic deferral escalation can help women overcome these challenges. The firm also urges sponsors to offer more in-plan lifetime income opportunities that allow investors to hedge against longevity risk. 

“Make support resources relevant and accessible. A benefit of providing financial wellness education at the worksite is that it may be the most effective way to reach women, who are often time-starved and unable to dedicate personal time to their finances,” researchers conclude. “Female workers tend to be advice-seekers and often seek collaboration before making a decision. Worksite-based counseling, which may occur in-person, telephone, or video chat, can help.”

The full research paper is available for download here. 

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