Married couples entering retirement could need as much as $383,000 in savings to cover healthcare costs for the rest of their lives, according to a new report by the Employee Benefit Research Institute (EBRI).
An average 65-year old man should have saved $96,000 to cover premiums and prescriptions in order to have just a 50% chance of meeting his healthcare spending needs in retirement, the report said. A 65-year-old woman should have saved $116,000, and a couple should have $212,000 earmarked specifically for these costs.
To have a 90% chance, the cost rises to $166,000 for the 65-year-old man, $197,000 for the 65-year-old woman and $318,000 for the couple. In an extreme case, an average couple with very high prescription expenses would need $383,000 for a 90% chance of meeting that need, the report said.
But the study sid retirees who enroll in a Medicare Advantage plan would have to pay only about 57% of these amounts.
The findings came out of a new simulation model created by the Washington, D.C.-based research and advocacy group that incorporated recent changes to Medicare Part D and then looked at the impact that Medicare Advantage and Medigap plans have on retirees’ expenses.
“Medicare was not designed to cover healthcare expenses in full. Deductibles for inpatient and outpatient services were part of the program when it was established in 1965,” wrote researchers Jake Spiegel and Paul Fronstin in their analysis. “In the future, despite the introduction of the cap on Part D out-of-pocket spending, individuals may have to pay greater shares of their overall health costs in retirement because of the financial condition of the Medicare program and cutbacks to the employment-based retiree health programs.”
In the report, EBRI considered the following as the health expenses for which a retiree’s savings would be needed: premiums for Medicare Parts B and D, the Part B deductible, premiums for Medigap Plan G, and out-of-pocket costs for prescription drugs. Not included were long-term-care expenses and things like dental, vision and hearing services.
The study also assumed that retirees enrolled either in Medigap Plan G or in a Medicare Advantage plan, which about half of all retirees choose. That’s expected to rise to 60% within the decade. And within the Medicare Advantage plan, 69% of enrollees choose a zero-premium option.
When factoring in the age of retirement, longevity, the availability of health insurance to supplement Medicare, health status, out-of-pocket expenses, and the rate of increase for those expenses, EBRI determined that simply coming up with an average would be too small for about half of the population, the report said.
Therefore, the researchers used a Monte Carlo simulation model to run 100,000 options for each kind of coverage. The model also assumed a 7.3% annual return on the lump sum needed at the beginning of retirement to fund these healthcare expenses.
The results of the modeling showed a significant difference between retirees who used Medicare Advantage plans and those who didn’t. For example, to have a 90% chance of having enough savings paying all the premiums and out-of-pocket drug expenses separately, a 65-year-old man will need to have saved $166,000, a 65-year-old woman $197,000, and a couple $318,000.
However, with a Medicare Advantage plan, the needed savings would be $96,000, $113,000 and $184,000, respectively, all of which are roughly just 57% of what’s needed for retirees who don’t use a Medicare Advantage plan.
“In general, savings targets tend to be lower for Medicare Advantage enrollees relative to Medigap enrollees, but there are tradeoffs for retirees to consider,” the report said. “For example, enrollees generally trade lower premiums for higher out-of-pocket spending, and some Medicare Advantage plans have narrower networks.”