- This 1 Expense Could Cost Retirees 5,000
- The rising cost of healthcare in retirement
- How to plan for retirement healthcare costs
- The Average Cost of Senior Living: Can You Afford It?
- Rising Cost of Living
- Housing-Related Setbacks
- Healthcare Expenses
- Financial Assistance Options for Senior Living
- Medicaid and Medicaid Waivers
- Retirement Income
- Additional Options for Paying for Assisted Living
- The Real Cost of Retirement: 4 Most Underbudgeted Retirement Expenses
- #1 Medical Expenses
- #2 Medicare
- #3 Long-Term Care
- #4 Household Expenses
- Here’s a more realistic way to look at health care costs in retirement
- Medical costs may be more predictable than you think
- A typical range: ,900 to ,000
- Long-term care is still a wild card
- More from NerdWallet:
- Retired Couples Need 5,000 to Pay for Medical Expenses
- Other key findings
- Present Value is the Value of All Future Cash Flows (Positive and Negative)
- Should You Buy a Medigap Policy?
- How to Pay for Health Care Expenses in Retirement
- Maintain a Healthy Lifestyle
- A Contrary Point of View
This 1 Expense Could Cost Retirees $285,000
You've probably factored housing costs, utilities, insurance, groceries, taxes, and travel into your retirement plan. But if you've forgotten about healthcare, your retirement savings may fall short of your needs — $285,000 short, to be precise.
That's Fidelity's latest estimate for what a 65-year-old couple retiring in 2019 will need to cover their healthcare costs in retirement. It's an increase of $5,000 compared to a couple retiring in 2018. And that number is ly to continue rising.
If you haven't planned for retirement healthcare costs, you may end up draining your retirement savings faster than planned, leaving you without enough money to pay your bills in your final years. But this doesn't have to happen. Below, I explain why retirement healthcare costs are rising and how you can plan for them.
Image source: Getty Images.
The rising cost of healthcare in retirement
There are several reasons retirement healthcare costs are going up. First, people are living longer today than they were a generation or two ago, so they simply need more money to cover these extra years. This is especially true for women who typically live longer than men.
The Fidelity study estimates that a 65-year-old woman retiring today would need $150,000 to cover retirement healthcare costs while a 65-year-old man would only need $135,000.
These estimates include Medicare's premiums, deductibles, and copays, but they do not include things that Medicare doesn't cover, dental work, long-term care, and vision coverage.
If you retire before 65, you're placing an even larger burden on yourself because you'll have to purchase your own health insurance to cover you in the interim until you're eligible for Medicare, and these policies are usually more expensive than a health insurance policy you'd get through an employer. But going without health insurance during this time is risky because a single accident could cost you thousands of dollars.
Another factor that plays into the rising retirement healthcare costs is inflation.
The annual medical inflation rate has decreased over the last two years, according to the survey, but it still outstrips the regular inflation rate.
Over the past 20 years, medical costs have increased 70% faster than the general inflation rate, according to the Federal Reserve Bank of St. Louis, and there's no sign of that changing.
How to plan for retirement healthcare costs
You can use the $285,000 figure as a starting point when determining how much to save for healthcare, but if you're several years away from retirement, figure higher to account for inflation. The Centers for Medicare & Medicaid Services' Office of the Actuary estimates that healthcare costs will increase by 5.
5% annually from 2017 to 2026. So a 65-year-old couple retiring next year could need as much as $300,000 to cover their healthcare expenses. It may not climb this sharply, but you're better safe than sorry.
You should also plan for higher healthcare costs if you anticipate having above-average healthcare costs, due to a personal or family history of health problems.
You can save for retirement healthcare expenses in your 401(k) or IRA, but if you have a high-deductible health insurance plan — one with a deductible of $1,300 or more for an individual or $2,700 or more for a family — a health savings account (HSA) may be your best option.
HSA contributions reduce your taxable income this year, and you won't pay any taxes on them at all if you use them for qualified medical expenses. If you use the money for a nonmedical expense, you will owe taxes on it, plus a 10% penalty if you're under 65. Individuals may contribute up to $3,500 to an HSA in 2019 and families may contribute up to $7,000.
You can add an extra $1,000 to these limits if you're 55 or older but not yet enrolled in Medicare.
If your existing retirement plan doesn't include healthcare or doesn't allot enough money for healthcare, redo it now.
Don't forget to add in the cost of any supplemental health insurance policies, Medigap policies, you plan to purchase to help you pay for what Medicare doesn't cover. Once you've gotten your updated retirement cost estimate, increase your savings accordingly.
If you don't have room in your budget to save as much as you'd today, just save as much as you can and try to increase your contributions by 1% of your salary each year.
Healthcare is one of the most unpredictable expenses in retirement, but in almost every case, it amounts to hundreds of thousands of dollars. Planning for it is essential to keeping your retirement on track, so build these costs into your retirement budget today.
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The Average Cost of Senior Living: Can You Afford It?
Depending on your location, living in an independent living community can cost from $1,500 to $4,000 a month, and seniors residing in assisted living facilities have a monthly average cost ranging from $3,500 to $10,500 a month.
The average cost of senior living varies by state and region, but expenses are going up across the board for the basics seniors need every month. These expenses include rent, food, medication, and transportation costs.
Add to that fees for typical utilities, such as gas and electric, and the cost of living for seniors quickly mounts.
According to a recent study, a couple retiring today will need about $285,000 to cover expected medical expenses during their retirement. This is coupled with added living expenses and costs associated with housing and other necessary costs of living.
Many agencies that provided some relief for seniors are cutting services. This means seniors have to find alternative services or absorb costs themselves.
This often requires adjusting monthly budgets and cutting back on travel plans and other non-essential expenses.
Rising Cost of Living
Social Security recently provided seniors with a cost of living adjustment of 2.8%, the first since 2012, and it is scheduled to be an annual increase under the current administration.
While this is good news for seniors, any real benefit of such an increase in Social Security benefits is offset by rising costs of medical care, energy costs, and other related expenses.
This increase is and hovers around the same point as the country’s inflation rate, as an attempt to offset the cost of expenses that increase every year for everybody. According to the AARP, more than 6.4 million seniors over the age of 65 live below the federal poverty level.
A growing number of seniors put off retirement or work part-time to supplement their income- a 2014 survey showed that over a third of elders plan to work well past their 70s.
Classic retirement options pension plans, employer-contributed 401K plans, and Social Security retirement insurance may be options for some elders, but many no longer have access to the type of employment that offers these retirement benefits.
Pensions are quickly becoming a relic of the past, and are commonly only available to public-sector and union employees- in 2018, only 13% of private-sector employees had a defined pension plan, dramatically lower than the 35% of private pension employees in the early 90s.
The recent mortgage crisis has taken its toll on seniors, with some falling behind in their payments and facing foreclosure.
In addition to the mortgage crisis, predatory lenders offering reverse home mortgages have created an added crisis for seniors across the country, with reports in every state of elders losing the very homes they relied on to live as well as supplement their income when they had few retirement options.
The only federally insured reverse mortgage is available through the Department of Housing and Urban Development, but there are other lenders willing to offer this product, which is only available to those over age 62 who own their homes.
Unfortunately, hundreds of thousands of elders have and are still falling short of their tax obligations, and have lost or will soon lose their homes- this crisis is especially hard in urban neighborhoods with low income and a large percentage of African American residents, with over six times more reverse mortgage foreclosures than in other neighborhoods.
It’s easy to see why an increasing number of seniors cannot rely on their nest eggs to bail them dire financial straits. Some seniors are turning to family members for help, but a less-than-robust economy is putting the pinch on everybody.
It’s hard for family members who are struggling themselves to chip in and help their parents or grandparents. Still, people will always want to help their aging loved ones; so, as of 2015, 34.
2 million adults will care for a family member over age 50, as well as provide groceries and help pay bills. While there are many benefits of caregiving, money is not usually one of them, so these family caregivers are also dramatically affected by the costs that come along with aging.
Luckily, many states offer Medicaid payments to family members who care for their aging loved ones that qualify for Medicaid benefits.
Medicare cutbacks are adding to the expenses some seniors now have to absorb, in addition to being the leading cause for nursing home closures as doctors are able to be reimbursed for less services. Many doctors are also reluctant to accept new patients since they do not receive the same level of reimbursement they did before.
Financial Assistance Options for Senior Living
The average Social Security income is just over $17,500, and the low end of independent living for seniors in the US is just under that figure, meaning those able to utilize SSI will be just making ends meet with it. Nationwide budget crunches are reducing the money available for programs aimed at helping seniors. But, there are still options to help reduce the burden of paying for assisted living.
Medicaid and Medicaid Waivers
Most assisted living facilities accept financial assistance, but some will only accept private pay residents, and long-term care insurance coverage.
Many states offer Medicaid payments for eligible low-income seniors, including payment for assisted living services medication reminders, housekeeping help, and assistance preparing food.
Most states offer some type of Medicaid program to help eligible seniors pay for assisted living, except for Alabama, Louisiana, and Kentucky. On top of Medicaid, there are often other state and federal programs to help subset the cost of senior living, such as Social Security income.
Retirement plans are still a great way to save for retirement- whether through an employer or self-funded. If you are one of the millions of Americans who don’t have access to an employer-funded 401K, you can contribute to your own plan, with a trusted investment firm.
Long-term care insurance is a supplementary plan meant only to cover the cost of assisted living and other long term care programs, as most health and life insurance plans will not pay for long-term care.
This type of insurance is now offered through many employer-sponsored retirement plans, and you can purchase your own plan off the public market- see this handy guide for more info and links to public brokers.
Additional Options for Paying for Assisted Living
Some retirees will pay for their aging care out-of-pocket, called private payment.
If you are in a higher income bracket, it’s possible that you’re going to be funding your retirement entirely your own pocket.
If this is the case, it can be crucial to know what to expect when preparing for retirement when you plan to live in assisted living, and signing up for a retirement community.
It might even make more sense for you to move to a less expensive area to retire if you live in an area with a high cost of living. For more information on the cost of living in an assisted living facility, check out our state-by-state buying guide to assisted living.
The cost of aging services varies across the country. Our researchers have spent hundreds of hours talking to the directors of retirement communities across the country to find out the real cost of living in an assisted living facility.
We’ve gathered the monthly cost of room and board, as well as the base level of care services, meaning basic ADL help, meals, and housekeeping, for over 800 (and counting) facilities across the country.
According to our research, the least expensive states are as follows:
- Florida comes in as the least expensive state, as well as one of the most beautiful. Assisted living services here average around $3,000 a month for all-inclusive care, memory care averages at $4,400 and independent living centers average $2,300.
- The second most affordable state we’ve found to retire in is sunny Arizona- independent living communities here average at $2,400 a month, assisted living averages at $3,600 and memory care costs an average of $4,200.
- Ohio is the third most affordable state to retire in, with independent living costing around $2,500 a month, assisted living averaging $4,000 and memory care at $5,000.
Among the more expensive states for senior living expenses include California and Washington.
Communities across the globe have created resources for elders, families, and their caregivers.
To achieve the best outcomes in aging, you’ll need to have a network of support in your medical team, family, and extended community.
Given the expected rise in elderly populations across the globe, the World Health Organization (WHO) has partnered with many countries, including the US, and AARP, to create aging-friendly communities by partnering with cities and corporations to improve infrastructure for those in their later years. The goal of this program is to educate city leaders on the best ways to improve life for elders, such as lighted sidewalks with benches, public restrooms, and easy access to public transportation.
Some communities have dedicated resources to helping build Accessory Dwelling Units, or ADUs, from existing houses. These small dwellings are perfect for a single person or a couple of elderly people who don’t need much space but want their own affordable homes to age in.
These dwellings are fully customizable and can have aging friendly home modifications walk-in showers, handrails throughout, and short nap carpet for ease when a walker is needed.
Volunteers compile state regulations online to help homeowners determine their local building codes, and you can see a helpful guide to building an ADU by the AARP.
The Real Cost of Retirement: 4 Most Underbudgeted Retirement Expenses
In Retirement Mistakes, Retirement Tips
Planning for the type of retirement lifestyle you want is important so you don’t retire and realize you’ve underbudgeted retirement expenses.
Depending on the retirement lifestyle you want and can afford, some expenses will go down, while others may go up.
For example, if you downsize or move to a less expensive city, your housing costs should decrease.
But what about those expenses that may go up–such as healthcare? Keep reading below for the 4 most underbudgeted retirement expenses.
#1 Medical Expenses
Healthcare is expected to be one of the largest retirement expenses–with an estimated $285,000 (after tax) in medical expenses needed in retirement for the average couple over 65 in 2019, according to Fidelity Retiree Health Care Cost Estimate.¹
This number does not include long-term care costs. (More on that below.)
Factors contributing to soaring costs include…
- People are living longer.
- Healthcare inflation.
- Average retirement is 62, while Medicare eligibility is 65.
The Fidelity report broke it down further: with males needing roughly $133,000 and females $147,000 to pay for healthcare in retirement.
Remember, the report is for retirees in 2019–not in a decade or two. This number is ly to increase in the coming years.
However, an HSA Bank survey found that 67% of people age 65 and older believe they need less than $100,000 for healthcare.²
The gap between what retirees will actually need and what they think they will need clearly shows how many people underestimate healthcare expenses in retirement.
Of course, the exact amount you’ll need depends on…
- How healthy you are.
- When and where you retire.
- How long you live.
- Your tax rates in retirement.
- How you pay for medical expenses.
With many of the above factors unknown, it’s important to overbudget for healthcare.
The most basic Medicare plan is free for most people 65 and over, but it does not cover certain out-of-pocket costs such as deductibles, copayments, and supplemental insurance often needed.
There are four parts to Medicare: A, B, C, and D, and each covers different things.
You can enroll in one or more parts, and usually have to pay a monthly premium income.
Medicare Part A and B are the most commonly selected, as these parts cover many services needed.
However, unless you have Part D, Medicare does not cover medication.
Most dental and vision aren’t covered under Medicare–neither are hearing aids.
Because Medicare doesn’t cover everything, many retirees end up paying for supplemental health insurance through Medicare Advantage, offered through private insurers.
Medicare Advantage falls under Part C, and people are required to be enrolled in Parts A and Parts B to qualify for Part C.
In 2019, the standard monthly premium for Part B is $135.50 per month.
The base monthly premium for Part D is $33.19. However, costs vary depending on what pharmacy you go to, your medications, and the plan you select.³
Part C premiums are set by private insurance companies and, as a result, vary.
Do you see how quickly all these premiums, out-of-pocket costs, and deductibles can add up?
Do you see how easy it is for many people to underbudget retirement expenses in this area?
One final note on Medicare: It can be complex and difficult to understand. If you’re nearing 65, it’s important you do your research and understand what options are right for you.
#3 Long-Term Care
Another underbudgeted retirement expense is long-term care.
As mentioned above, it is not covered under Medicare.
Genworth, a long-term care insurer, recently published the Cost of Care Survey, conducted by CareScout®.
The study, which ran from 2004-2018, revealed that “long term care costs for nursing homes, assisted living facilities, and in-home care are higher than most people have planned for and only continue to rise.”⁴
From 2004 to 2018, the cost for facility and in-home care services rose on average from 1.5% to 3.8% per year.
Specifically, the annual cost for a private room in a nursing home for 365 days of care in 2018 was $100,375 compared to $65,185 in 2004.
Assisted living costs rose 67% from 2004 to 2018.
And the national in-home health aide costs are now at $22 per hour.
While actual costs vary from state to state, and how long you live is an important factor, one thing is clear: long-term care costs are rising and are not expected to stop anytime soon.
In fact, the survey concluded: “At this rate, some care costs are outpacing the U.S. inflation rate of 2.1% by almost double.”⁵
If you fail to properly plan and save for long-term care, you run the risk of your adult children having to financially support you.
#4 Household Expenses
Your housing costs in retirement may decrease if you downsize or move to a less expensive part of the country or the country.
In fact, according to a Fidelity report, the average housing costs drop for retirees.⁶
But you’ll still have household expenses.
In retirement, you will be living on less money. That’s a given.
Yet, another one of the most underbudgeted retirement expenses is household costs.
If you think you are going to be able to afford the same household expenses in retirement as you do while you have a salary, think again.
What you normally could cover when you had a salary can become a big expense in retirement if you haven’t saved enough.
What if you accidentally run into the garage door (hey, it happens!). Or the air conditioner goes out and you need a new unit, or the roof needs to be replaced.
For many who are retired and on a fixed income, charging these types of repairs isn’t always an option because there’s often no way to pay off the balance without incurring a ton of interest.
Whether you live in an apartment, condo, or smaller home, you need to save for household repairs that pop up.
Make the best decision for your financial future.
The type of advice you receive about your finances may be impacted by the type of advisor you resource for advice.
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Here’s a more realistic way to look at health care costs in retirement
You won’t pay for health care in retirement with one lump sum. That’s the way these expenses are often presented, though, and the amounts are terrifying.
Fidelity Investments, for example, says a couple retiring in 2019 at age 65 will need $285,000 for health expenses, not including nursing home or other long-term care.
The Employee Benefits Research Institute says some couples could need up to $400,000 — again, not including long-term care.
The Center for Retirement Research at Boston College hasn’t updated its figures recently, but back in 2010 estimated a typical couple could spend $260,000 for medical and long-term care, with a 5% risk that costs will exceed $570,000.
No wonder 45% of people in their 50s and early 60s have little or no confidence that they’ll be able to afford their retirement health care costs, according to a survey by the University of Michigan.
Medical costs may be more predictable than you think
The approach of presenting people with a huge, perhaps unattainable, figure has long bothered Jean Young, senior research associate with the Vanguard Center for Investor Research.
“The thing is, it’s not helpful, it’s not actionable, it’s not relatable,” Young says.
You also may need six figures to cover food, or transportation, or shelter in a typical retirement. But these are costs you pay over time — just you’ll pay for health care.
Also see: Here’s how to create a pension and save on taxes
Young and other Vanguard researchers partnered with actuaries at Mercer Health and Benefits consulting firm to create a proprietary model what retired people actually spend on health care. What they found was that medical costs tend to be in certain ranges, a handful of factors:
- Where you live.
- Your health.
- Your parents’ health.
- Whether you buy supplemental coverage.
- Your income.
Higher-income people pay larger premiums for certain parts of Medicare. Some premiums also vary by location, as do medical costs in general. How much health care you’ll consume is greatly influenced by how healthy you are when entering retirement, and, to some extent, your genes.
“The actuaries know that the health status of your parents tends to pass generationally,” Young says.
A typical range: $4,900 to $6,000
Here’s the number the researchers came up with: $5,200. That’s the median amount a typical 65-year-old woman could expect to spend annually for premiums and out-of-pocket medical, dental and vision costs in 2018. (Median is the point where half pay more and half pay less. The study used women because they have slightly higher long-term costs, but the gender difference is about 2%.)
Read: If you want to have enough money when you retire, you need to know this
That assumes the woman lives in a medium-cost area, is at medium risk for health care costs (she either smokes or has a chronic medical condition or two) and buys supplemental Plan F, the most popular Medigap policy. Eighty percent of those in similar situations would face costs in the range of $4,900 to $6,000.
The models also include worst-case scenarios. If her health deteriorated to the high-risk category, her costs could exceed $11,000. If she opted to do without a Medigap policy and had a bad year, she could pay over $21,800.
Long-term care is still a wild card
Retirement planning involves a lot of educated guesses. How long you’ll live, inflation rates, returns on your investments, your expenses — these may not end up being what you expected. Financial planners typically craft their assumptions about what’s most ly to happen and may suggest insurance or contingency plans to cover the worst-case scenarios.
Long-term care costs remain the big wild card. Half of people over 65 don’t incur any long-term care costs, Young says, and a quarter incur less than $100,000.
“The problem is, 15% are going to spend a quarter of a million or more,” Young says.
Related: These Arizona retirees ‘couldn’t afford’ America — now they live their dream life on $2,000 a month in Ecuador
Those who exhaust their savings may end up on Medicaid, the government program for the indigent that pays for long-term care (Medicare does not). People who have a few million dollars saved may opt to “self-fund,” or pay for it without help.
Those in between might consider some kind of long-term care insurance, or earmark assets they can tap if necessary, Young says. That could be your home equity or investments that give you income while you’re healthy but could be sold to pay for long-term care. The key is to not use up those resources for other costs.
Holding something in reserve is particularly important for women, who are twice as ly to require paid care.
“We live longer; we tend to care for our husbands,” Young says. “The risk is higher for women.”
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Retired Couples Need $325,000 to Pay for Medical Expenses
Call it a wake-up call.
A 65-year-old couple, whose drug expenses are in the 90th percentile and who want a 90% chance of having enough money to pay health care expenses throughout retirement, need savings of $325,000 in 2020.
And 65-year-old couples with median prescription drug expenses who want a 50/50 shot of paying for health care expenses throughout retirement need savings of $168,000. For a 90% chance of having enough, that same couple needs $270,000 in savings.
“I hope it is a wake-up call,” said Paul Fronstin, director of the health research and education program at the Employee Benefit Research Institute (EBRI) and co-author A Bit of Good News During the Pandemic: Savings Medicare Beneficiaries Need for Health Expenses Decreases in 2020. “This is a serious situation that people may not have enough money to cover their health care.”
What's more, Fronstin noted in an interview, the older you get, the more health care you're going to need. “That's a fact,” he said. “So hopefully people would be prepared or this (research) will cause them to start working on a plan to become prepared.”
The EBRI report examines the savings needed to pay for premiums for Medicare Parts B and D and Medigap Plan G, as well as out-of-pocket spending for outpatient prescription drugs. Medicare generally covers only about two-thirds of the cost of health care services for Medicare beneficiaries ages 65 and older.
“We take an over-simplistic approach by assuming everybody has really good insurance,” said Fronstin. “We do that to take away the uncertainty related to using health care.”
The projected savings do not, however, include the cost of long-term care, which Fronstin said is a “big uncertainty” and could easily double the savings needed to pay for health care and medical expenses in retirement. Fronstin did note, however, that “very few people need long-term care.”
Read Cost of Long Term Care by State | Cost of Care Report to learn the potential costs associated with long-term care.
To be fair, there was some good news in the EBRI report.
In 2020, the predicted saving targets for Medicare beneficiaries to cover health premiums, deductibles, and certain other health expenses in retirement have fallen between 8 and 10% since 2019.
And these are the biggest declines the authors of the EBRI report have seen since 2012, with the exception of 2013, when needed savings declined between 6 and 11%.
According to EBRI, the main reason for the decrease in needed savings from 2019 to 2020 is related to the adjustment made each year to re-establish the baseline for out-of-pocket spending associated with prescription drug use.
The Medicare Trustees reduced projected costs for Medicare Part D premiums and out-of-pocket expenses.
Projecting these and other changes in Medicare Part D out-of-pocket spending over the course of one’s lifetime results in a significant reduction in savings targets for Medicare beneficiaries who would benefit from such changes the most — those with prescription drug spending at the 75th and 90th percentiles throughout retirement.
Some of the reduction is also due to a change in EBRI’s model from using data from Medigap Plan F to Plan G.
Other key findings
- In 2020, a 65-year-old man needs $73,000 in savings and a 65-year-old woman needs $95,000 in savings for a 50% chance of having enough to cover premiums and median prescription drug expenses in retirement, according to EBRI.
- For a 90% chance of having enough savings, the man needs $130,000 and the woman needs $146,000, according to EBRI.
The good news? The amount of savings a man or woman needs to fund medical expenses in retirement is down 10% from 2019.
The data used in EBRI’s analysis come from a variety of sources.
EBRI employs a Monte Carlo simulation model for its evaluation that simulated 100,000 observations, allowing for the uncertainty related to individual mortality and rates of return on assets in retirement.
By way of comparison, Fidelity Investments estimated that a 65-year old couple retiring in 2019 could expect to spend $285,000 in health care and medical expenses throughout retirement, compared with $280,000 in 2018. For single retirees, the health care cost estimate was $150,000 for women and $135,000 for men.
EBRI, by contrast, doesn't “give one number because we think that while one number is helpful… it's also potentially misleading,” said Fronstin. “If you give an average… and you plan to be average you've got about a 99% chance of being wrong.
You may be wrong by a little bit or you may be wrong by a lot.
So we give a range of estimates that vary for the most part with longevity because the longer you live in our model, the more money you're going to need because it means you're paying premiums for that many more years.”
It's worth noting, too, said Fronstin, that retirees don't necessarily need to have this money earmarked for health care expenses set aside at retirement.
“You could pay these expenses pocket each year,” he said. “You pay your premiums each year, you pay your deductibles each year for part B and part D.
But just to give people a sense of the magnitude, we thought it was important to come up with the lifetime number.”
According to EBRI, the main reason for the decrease in needed savings from 2019 to 2020 is related to the adjustment made each year to re-establish the baseline for out-of-pocket spending associated with prescription drug use. The Medicare Trustees reduced projected costs for Medicare Part D premiums and out-of-pocket expenses.
Projecting these and other changes in Medicare Part D out-of-pocket spending over the course of one’s lifetime results in a significant reduction in savings targets for Medicare beneficiaries who would benefit from such changes the most — Medicare beneficiaries with prescription drug spending at the 75th and 90th percentiles throughout retirement.
Some of the reduction is also due to a change in EBRI’s model from using data from Medigap Plan F to Plan G.
So, how might one put this report into perspective? How might pre-retirees go about planning for medical and health care expenses in retirement?
Present Value is the Value of All Future Cash Flows (Positive and Negative)
First a bit of perspective. Most Americans don’t retire with a pot of money just for medical and health care expenses. To be sure, some advisers recommend that. But it’s not the reality today.
Most people pay for medical and health care expenses in retirement cash flow, from savings, earned income, Social Security, pensions and other sources of income on an annual basis.
And viewed in that context, the health care number seems a bit more manageable and less overwhelming.
Consider: the numbers suggested by EBRI, Fidelity, and others represent the present value of a stream of annual expenses over the course of retirement.
But, in reality, couples with median prescription drug expenses that want a 50% chance of having enough to cover health care expenses in retirement don’t really need $168,000 in savings – at retirement.
They would need to come up with, say $14,500 per year, over the course of a 20-year retirement, or $12, 200 over a 30-year-retirement.
Should You Buy a Medigap Policy?
Given that EBRI's research factors in the savings needed to pay for Medigap Plan G premiums, we asked Fronstin whether older Americans should contemplate doing so as well.
In 2015, only one in four people in traditional Medicare had private, supplemental health insurance —also known as Medigap—to help cover their Medicare deductibles and cost-sharing requirements, as well as protect themselves against catastrophic expenses for Medicare-covered services, according to the Kaiser Family Foundation. Read https://www.kff.org/medicare/issue-brief/medigap-enrollment-and-consumer-protections-vary-across-states/.
According to Fronstin, there's no easy answer to the question. And it's made even more difficult by the fact that EBRI's research doesn't model the costs of Medicare Advantage plans, which need to be considered as well.
More than 24 million Medicare beneficiaries (36%) are enrolled in Medicare Advantage plans in 2020, according to the Kaiser Family Foundation. Read https://www.kff.org/medicare/issue-brief/a-dozen-facts-about-medicare-advantage-in-2020/.
EBRI hasn't modeled the costs of Medicare Advantage plans into its research for one big reason. It's complicated to do because premiums for Medicare Advantage plans are all over the map. And in the EBRI model, the goal is “to minimize the uncertainty related pocket expenses,” Fronstin said.
Still, Fronstin said older Americans should evaluate Medicare Advantage plans as well as Medigap plans because it may be a better option for them. “Everybody's situation is going to be different. So they shouldn't just take our model and assume that's what's going to be best for them,” he said.
How to Pay for Health Care Expenses in Retirement
According to Fronstin, it's ly that older Americans will need a variety of sources to pay for health care expenses in retirement, including savings, earned income, Social Security, and the .
Fronstin noted that health savings accounts (HSAs) can play a role but such accounts are “unly to play a significant role for people who are near retirement because they haven't been around long enough to build up a significant balance in there.”
For younger adults, however, HSAs offer the best possible tax advantages for those trying to save a pool of money to pay for health care expenses in retirement. “To the degree you could set money aside in an HSA and not touch it, that's great,” said Fronstin.
Ultimately, Fronstin said, “you have to look at your specific situation. What kind of savings do you have, where is it and what makes the most sense. Recognize that you might be able to cover this by just spending a part of your income every year.”
On average, older Americans spend about 5 to 15% of their income on health care expenses in retirement. Read https://www.bls.gov/opub/btn/volume-5/spending-patterns-of-older-americans.htm.
Maintain a Healthy Lifestyle
Another way to reduce the possible cost of medical expenses in retirement is to maintain a healthy lifestyle before retirement. Though everything does come with a cost.
Said Fronstin: “It (maintaining a healthy lifestyle) is going to play a role in how much you spend on everything else too, right? Because if you're healthy, you're out there being active and doing things and that potentially costs money, too.
But you know, you have to weigh it: Would you rather spend your money going to the doctor and on prescription drugs or would you rather spend your money doing some leisure activity? It doesn't necessarily make you richer, but it certainly affects your quality of life.”
A Contrary Point of View
Carolyn McClanahan, M.D., a certified financial planner with Life Planning Partners, has come “to the conclusion that trying to predict medical expenses as a lump sum is a waste of time.”
“As this EBRI report shows, many variables can affect their predictions – recessions and people using less health care (because they either can’t afford it, are tired of dealing with your broken system, or now – fear of coronavirus) have a significant effect on the final numbers,” she said.
Here's the way McClanahan is planning for her client's health care expenses:
- What are they spending for out-of-pocket care now, including non-traditional expenses such as massage therapy, chiropractic care, etc.? Put this in as a regular cash flow item inflated at normal inflation.
- Include the yearly current cost of their health care premiums. At age 65, put in the cost of the Medicare premiums.
She also uses the average inflation rate for all products and services to calculate future health care expenses, instead of the current rate of inflation for health care, 4.8%. “Anything more than that is unsustainable in the long term,” she says.
Of note, the long term average rate of health care inflation is 5.28%, according to the Bureau of Labor Statistics.
Listen to Paul Fronstin discuss the study: