Recommended Savings Targets For Health Care Expenses In Retirement

Introduction Recommended Savings Targets for Health Care Expenses in Retirement Comparing Recommended Health Care Savings Targets to Actual Savings Uncertainty about Savings for Future Health Care Costs Preparing for a Healthy Retirement About

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Recommended retirement health care savings targets generally take into account the cost of health care coverage, such as Medicare Part B and Part D premiums, premiums for any supplemental Medicare coverage (e.g., Medigap), and out-of-pocket expenses not covered under Medicare. Importantly, recommended savings targets often do not include the costs of long-term care services – which Medicare generally does not cover – due to the considerable variability in long-term care needs among seniors. For the purposes of this analysis, we reference savings targets that do not include long-term care costs.

Long-term services and supports (LTSS) help individuals with functional or cognitive limitations address their health and personal needs. These services may include providing medical care, but also often include assistance with personal tasks, such as bathing, dressing, and eating.[5] LTSS can be administered in a variety of settings including the home, assisted living centers, or nursing homes.

Approximately 70 percent of adults age 65+ are expected to use LTSS, and individuals 85+ are four times more likely to need LTSS compared to adults age 65-84. In 2013, the United States spent $310 billion on LTSS, with more than half of that covered by Medicaid and the rest paid for by private insurance, other public programs, and out-of-pocket spending.[6]

Original Medicare is a federally administered health insurance program that covers many important services for beneficiaries under a fee-for-service model, including inpatient hospitalizations and hospice or home health services (Part A) as well as doctors’ visits, medical supplies, and preventive services (Part B). Both Medicare Part A and Part B have deductibles and co-insurance requirements, and there is no out-of-pocket maximum for Original Medicare beneficiaries. 

Key services not covered by Original Medicare include routine dental care and dentures, vision care and prescription eyeglasses, and long-term services and supports (LTSS). Prescription drug coverage is also not covered by Original Medicare, but is available for purchase through a Medicare Part D prescription drug plan.

To cover some of the out-of-pocket costs not paid by Original Medicare, about 25 percent of beneficiaries choose to purchase Medicare supplemental insurance, also known as Medigap. These plans are standardized by the federal government and are offered by private insurance companies, and each plan covers different types of out-of-pocket costs not covered by Original Medicare.[7]

Instead of Original Medicare, more than 30 percent of Medicare beneficiaries choose a Medicare Advantage plan for their Medicare coverage. Medicare Advantage plans are offered by private insurance companies using a coordinated care approach and can cover additional services not covered by Original Medicare, including wellness activities, vision care, prescription drug coverage, and dental services. Unlike Original Medicare, all Medicare Advantage plans offer seniors a cap on out-of-pocket costs for covered in-network services. The premiums and cost-sharing obligations for Medicare Advantage vary by plan and geography.[8]

Health Savings Targets for Those Currently Retired

Estimates vary on how much current 65-year-olds will need to have saved to meet their health care expenses in retirement, with recommended savings targets differing by as much as 39 percent for someone with an adverse health condition compared to a healthy individual.[9] But regardless of a person’s health conditions, recommended savings amounts are significant. For example: 

A 65-year-old couple with Original Medicare retiring in 2016 will need $260,000 (in 2016 dollars) to cover about 22 years of Original Medicare premiums, cost-sharing, and non-covered medical expenses in retirement, not inclusive of long-term care expenses.^[10]
Similarly, a 65-year-old man with median prescription drug spending retiring in 2016 will need $127,000 (in 2016 dollars) to have a 90 percent chance of meeting his health care costs in retirement, and a 65-year-old woman will need $143,000 for her future health care costs.^[11]

Health Savings Targets for Future Retirees

Less research has been published on savings targets for future retirees,[12] but the projected annual growth rate for health care expenditures – estimated to average 5.6 percent annually between 2016 and 2025 – is a key driver of recommended health care savings targets.[13] For example:

A 55-year-old couple retiring in ten years will need approximately $465,000 in today’s dollars to cover projected premiums for Original Medicare, a Part D prescription drug plan, and a Medigap policy, as well as projected out-of-pocket dental, vision, and other expenses not inclusive of long-term care.^[14]
A 45-year-old couple planning to retire at the age of 65 is expected to need slightly more than $590,000 in today’s dollars to cover their premiums and anticipated out-of-pocket health care costs during retirement.^[15]

[5] Congressional Budget Office. Rising Demand for Long-Term Services and Supports for Elderly People. Published June 2013. Accessed April 3, 2017. [6] The Kaiser Commission on Medicaid and the Uninsured. Medicaid and Long-Term Services and Supports: A Primer. The Kaiser Family Foundation. Published December 2015. Accessed April 3, 2017. [7] Centers for Medicare & Medicaid Services. What’s Medicare Supplement Insurance (Medigap)? Accessed April 3, 2017. [8] Centers for Medicare & Medicaid Services. 13 Things to Know About Medicare Advantage Plans. Accessed April 3, 2017. [9] Harlow, WV and Brown, KC. Health State and the Savings Required for a Sustainable Retirement. The University of Texas at Austin Faculty. Published December 2, 2016. Accessed April 3, 2017. [10] Fidelity Viewpoints. Retiree health costs rise. Fidelity Investments. Published August 16, 2016. Accessed April 3, 2017 [11] Employee Benefit Research Institute. Savings Medicare Beneficiaries Need for Health Expenses: Some Couples Could Need as Much as $350,000, p. 2. Employee Benefit Research Institute Notes. 2017;38(1). Published January 31, 2017. Accessed April 3, 2017. [12] Future retiree savings estimates are based on the assumption that a male-female couple will retire together at age 65 and have life expectancies of 87 and 89, respectively. [13] Centers for Medicare & Medicaid Services. National Health Expenditure Projections 2015 – 2025 Forecast Summary. Updated March 2017. Accessed April 3, 2017. [14] HealthView Services 2016 Retirement Health Care Costs Data Report. HealthView Insights. Published May 2016. Accessed April 3, 2017. [15] Ibid.

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