Savings Needed for Health Care in Retirement Continues to Grow

Individuals should understand that Medicare was not designed to cover health care expenses in full, and the most recent estimates by the Employee Benefit Research Institute (EBRI) show that, at the extreme, out-of-pocket costs could reach $399,000 or more.

The reason individuals could incur costs greater than the EBRI estimates is that the estimates include the savings needed to pay for premiums for Medicare Parts B and D, premiums for Medigap Plan F, and out-of-pocket spending for outpatient prescription drugs, but not savings needed to cover any expenses associated with long-term care or any spending for health care services not traditionally covered by Medicare, such as dental care.

EBRI estimates that in 2018 a man with median drug expenses would need $75,000 in savings and a woman with median drug expenses would need $99,000 if each had a goal of having a 50% chance of having enough money saved to cover health expenses in retirement. If either instead wanted a 90% chance of having enough savings, $148,000 would be needed for a man and $161,000 would be needed for a woman.

EBRI explains that because women have longer life expectancies than men, they will generally need larger savings than men to cover health insurance premiums and health care expenses in retirement regardless of the savings targets.

A couple both with median drug expenses would need $174,000 to have a 50% chance of having enough money to cover health expenses in retirement. They would need $240,000 to have a 75% chance of covering their expenses and $296,000 to have a 90% chance. These estimates are 3% to 13% higher than the savings targets estimated in 2017. EBRI says the main reason for the increase in needed savings is related to the adjustment that is made each year to re-establish the baseline for out-of-pocket spending associated with prescription drug use.

Needed savings in 2018 for a man with drug expenditures at the 75th percentile throughout retirement would be $83,000 if he wanted a 50% chance of having enough savings to cover health care expenses in retirement. For a woman, the savings target would be $110,000. If either instead wanted a 90% chance of having enough savings, $156,000 would be needed for a man and $178,000 would be needed for a woman.

A couple both with drug expenses at the 75th percentile would need $193,000 to have a 50% chance of having enough money to cover health care expenses in retirement. They would need $266,000 to have a 75% chance of covering those expenses and $328,000 to have a 90% chance.

In 2018, for individuals at the 90th percentile in drug spending at and throughout retirement, a man would need $103,000 in savings and a woman would need $135,000 if each had a goal of having a 50% chance of having enough money saved to cover health care expenses in retirement. If either instead wanted a 90% chance of having enough savings, $191,000 would be needed for a man and $217,000 would be needed for a woman.

A couple both with drug expenses at the 90th percentile would need $238,000 to have a 50% chance of having enough money to cover health care expenses in retirement and $325,000 to have a 75% chance of covering their expenses. They would need $399,000 to have a 90% chance of covering their expenses.