Special Planning Needed for Health Costs in Retirement

Individuals should consider the expense and usage of non-recurring health care services, which increases with age, when planning for retirement.

The cost for the more predictable health care expenses—doctor visits, dentist visits, and usage of prescription drugs—remains stable throughout retirement, according to an analysis from the Employee Benefit Research Institute (EBRI). 

EBRI data shows the average annual expenditure for these recurring health care expenses among the Medicare-eligible population is $1,885. A person with a life expectancy of 90 would require $40,798 at age 65 to fund his or her recurring health care expenses, assuming a 2% rate of inflation and 3% rate of return. This required amount does not account for recurring expenses such as insurance premiums or over-the-counter medications.

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However, the usage and expense of non-recurring health care services, such as overnight hospital stays or outpatient surgeries, increases with age. Nursing home stays in particular can be very expensive, EBRI notes, with average spending in this category for people ages 85 and above during a two year period being $24,185.

“Health care is one of the key components of retirement expenses, and is the only part of household expenditures that increase with age,” says Sudipto Banerjee, EBRI research associate and author of the report. “While some of these costs are more predictable, others are uncertain, and for many people these expenses spike toward the end of life when resources are slim. To successfully manage your resources in retirement, a good plan may include separate preparations for each.”

Usage of recurring health care services typically goes up with income, while usage of non-recurring health care services goes down with income (except outpatient surgery and special facilities use). The top income quartile spends significantly more on both nursing home and home health care expenses than the others, with the average expenses for nursing home and home health care at $16,595 and $1,642, respectively, for the third income quartile, and $28,133 and $4,695, respectively, for the top income quartile. These findings are potentially a result of Medicaid coverage for the lower-income, lower-asset groups, according to EBRI.

EBRI also finds nursing home stays, home health care usage, and overnight hospital stays are much higher in the period preceding death. The survey reveals a majority of people in every age group above age 65 received in-home health care from a medically-trained person before death. For those ages 85 and older, 62.3% had overnight nursing home stays before death and 51.6% were living in a nursing home prior to death. Statistics show women older than 85 use nursing homes at a much higher rate than men.

The “Utilization Patterns and Out-of-Pocket Expenses for Different Health Care Services Among American Retirees” report includes data from the Health and retirement Study (HRS) of a nationally representative sample including U.S. households with individuals older than age 50. The full report is published in the February 2015 EBRI Issue Brief No. 411, online at www.ebri.org.

A Plan with Specific Goals Helps Savings Efforts

A survey found those with a “savings plan with specific goals” reported more success in savings efforts.

In the past year, there was an increase in the portion of respondents to the annual America Saves Week survey who said they were making good or excellent savings progress—from 35% in 2014 to 40% in 2015. 

More than half of respondents said they were “saving enough for a retirement” with “a desirable standard of living” (55%). Fifty-two percent save at least 10% of their income, and among the non-retired, 49% save at work.

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The survey showed that those with a “savings plan with specific goals” save more successfully than those without a plan. Fifty-seven percent of those with a savings plan with specific goals report making good to excellent progress meeting their savings needs, versus 22% without a plan. Ninety percent with a plan say they are spending less than their income and saving the difference (compared to 50% without a plan), 82% indicate they have sufficient emergency savings (compared to 48%), and 65% say they are saving enough for retirement (compared to 31%).

“Making a savings plan focuses one’s attention on how one spends and saves their income,” noted Dallas Salisbury, president and CEO of the Employee Benefit Research Institute, and founding director of the American Savings Education Council. “Those with a savings plan tend to be more careful spending money, less willing to borrow unwisely, and more likely to save conscientiously,” he added.

“Set a goal and make a plan” is the theme of this year’s America Saves Week, Salisbury said during a media conference. “Individuals should decide what they want to achieve, determine the steps they need to take to achieve that goal, and contact a financial institution to find a product that will help them meet their goal, or save at work via payroll deduction,” he added.

Salisbury also said employers can help employees meet their goals by making it easier to enroll in workplace retirement plans, and financial advisers should stress the importance of saving to individuals.

The survey findings were released for the 9th annual America Saves Week, a collaboration of the Consumer Federation of America (CFA), the American Savings Education Council (ASEC), and the Employee Benefit Research Institute (EBRI). A research firm interviewed a representative sample of 1,009 adult Americans from January 29 through February 1, 2015, by landline and cell phone. 

More information about America Saves Week is at http://www.americasaves.org/

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