Data and Research April 16, 2018

Study Raises Doubt on Just How Much Is Needed for Health Care Expenses in Retirement

The latest report from the Employee Benefit Research Institute says expectations of catastrophic health care expenses in retirement are likely flawed.

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An analysis from the Employee Benefits Research Institute (EBRI) has it questioning whether people are inefficiently self-insuring against catastrophic health care expenses that are unlikely to be incurred. 

If worrying about high costs of living wasn’t enough, American retirees are also battling through the thought of high health care costs in retirement. However, the latest report from EBRI says these expectations are likely flawed.

Data from the Health and Retirement Study (HRS) finds out-of-pocket health care expenses are typically miscalculated, as the median cumulative for long-lived elderly people (those who pass away at 95-years-old or older) rounded out at $27,000. Yet, this doesn’t signify low health care costs, either. Ten percent of this group reported spending $172,000 in health care expenses, and 5% said they paid $269,000 in out-of-pocket medical costs. Services included hospital stays, nursing home stays, outpatient surgery, doctor’s visits, prescriptions drugs, dental services, home health care and hospice care, according to EBRI. Additionally, all participants surveyed were at least 70 years of age.

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Of the services listed, nursing home amenities resulted in higher costs. Of those in the 10% and 5% group, out-of-pocket medical costs declined to $96,000 and $154,000, respectively, without the nursing home services.  

Aside from those in the top 10%, the median out-of-pocket nursing home expense is zero, says EBRI’s report. While these costs can be shattering, the common misconception of high medical fees during retirement has caused retirees to reserve assets as a safety net, should they need to insure it in the future.

The report points to nursing home expenses as the reason for increased medical costs. Without nursing services, average annual out-of-pocket medical costs declines from $2,012 to $1,607. For those in the top 10%, the median goes down from $11,047 to $7,357.

Besides age, gender plays a role in whether or not a retiree will utilize nursing home services throughout retirement. Women already pay higher health care costs, and the survey shows no sign of this ending once they retire. On average, women pay $2,187 in out-of-pocket medical expenses. Men, however, pay $1,807. The cost only heightens with age, as women in the top 10% must afford an annual out-of-pocket medical expense of $12,285, and those in the top 5% pay an annual cost of $20,808. For men, these sums are $8,887 and $16,129, respectively.

Without nursing home expenses, these numbers drastically reduce. On average, an annual out-of-pocket health care bills is $1,671 for women, and $1,496 for men. For women in the top 10%, the number declines to $7,700 and $13,058 for women in the top 5%. Men in the top 10% would pay $6,936 annually, for those in the top 5%—$10,995.

More information on the report can be found here.

Data and Research April 16, 2018

Slower Spending in Retirement Has Implications for Retirement Products, Education

EBRI says its finding that retirees among all levels of retirement savings are slow to spend down their assets could mean that retirement readiness should be measured differently or that more education is needed to help retirees with a spend-down strategy.

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The Employee Benefit Research Institute’s (EBRI)’s Issue Brief, “Asset Decumulation or Asset Preservation? What Guides Retirement Spending?” finds that retirees are not spending down their accumulated assets to fund their retirement needs—even when assets are plentiful or when there is guaranteed income available to ensure that retirees will not run out of money. The study reviews data reflecting how retirees actually use their non-housing assets during their first two decades of retirement by examining income and asset data from the Health and Retirement Study (HRS).

EBRI’s analysis found that regardless of pre-retirement asset size, rates of decumulation are low. Over an 18-year period following retirement, median assets declined only 24% for the low asset group of retirees—from $31,740 immediately after retirement to $24,000 eighteen years later. EBRI says this is somewhat intuitive. “It is not ‘irrational’ for [low-asset households] to hold on to their assets as long as possible,” the Institute says.

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However, EBRI found similar patterns when assets are greater. For the moderate asset group, median non-housing assets declined 27% (from $333,940 immediately after retirement to $243,070 18 years later). For those with the most substantial assets—starting with a median of $857,450 immediately after retirement, the decumulation rate was less than 11% (to $763,900 18 years later).

EBRI notes that having guaranteed income for life, such as a pension, didn’t make retirees more likely to spend down their assets. The study found that of all the subgroups studied, pensioners had the lowest asset spend-down rates. “This suggests that if the goal is to avoid spending down assets, pensioners are best suited to achieve it. In other words, if retirees seek to limit their spending to their regular flow of income (such as pension, Social Security income, or other annuity income), then pensioners are indeed best suited to avoid asset decumulation, as they have more regular income than others,” EBRI says.

EBRI questions the reasons for such low decumulation rates. It says if retirees are determined to preserve their assets and not to spend them down, this creates important implications—ranging from the type of retirement products offered to how retirement preparedness is assessed. However, if such drawdown patterns are the consequence of behavioral biases (e.g., inability to switch from accumulation to decumulation mode) or lack of education on how to spend down retirement savings, this has different implications when it comes to necessary tools and support for retirees as they seek to manage their assets in retirement.

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