Medicare Beneficiaries Need to Save More to Cover Health Expenses

December 2, 2015

Targets for savings needed to cover retirees' healthcare expenses are rising.

The amount of savings needed to cover healthcare expenses in retirement are going up again, following several years of decline, according to a new report from the Employee Benefit Research Institute (EBRI).

Between 2014 and 2015, the range of retiree health savings targets rose between 6% and 21%, EBRI found. Between 2013 and 2014, that retirement savings target declined 2% to 10% due in part to improved prescription drug coverage provided by the Affordable Care Act. The researchers used a simulation model to estimate the amount of savings needed to cover health insurance premiums and out-of-pocket healthcare expenses in retirement. The estimates made are for people who supplement Medicare with a combination of individual health insurance through Medigap Plan F coverage and Medicare Part D for outpatient prescription drug coverage.

The main reason for the current increase in needed savings is because of the yearly adjustment for out-of-pocket spending for prescription drug use, said Paul Fronstin, PhD, director of EBRI’s Health Research and Education Program and coauthor of the new report. Out-of-pocket spending for prescription drugs in the most recent data were higher than expected; thus, future estimates of needed savings have gone up.

The EBRI report found that the range of increases depends on how high the likely health expenses for an individual will go and how high the probability is that they have enough money available. For example, EBRI found that in 2015, a 65-year-old man would need $68,000 in savings and a 65-year-old woman would need $89,000 if each has a goal of having a 50% chance of having enough money to cover healthcare expenses in retirement. In order to have a 90% chance of having enough savings, a man should have $124,000 saved and a woman should have $140,000.

Those with high prescription drug costs would need to save substantially more. A married couple who both have drug expenses at the 90th percentile throughout retirement and who want a 90% chance of having enough money saved for retirement healthcare expenses by age 65 will need to increase targeted savings from $326,000 in 2014 to $392,000 in 2015.

“Many individuals will need more than the amounts cited in this report,” Dr Fronstin said, because the calculations used do not factor in savings needed to cover long-term care expenses, retiring earlier than eligibility for Medicare, and higher Medicare premiums related to higher income.

However, he noted that some workers will need to save less than is reported if they choose to work past age 65, and postpone enrollment in Medicare if they receive health benefits as active workers.