Amount of Savings Needed for Health Expenses for People Eligible for Medicare: Unlike the Last Few Years, the News Is Not Good

24 Pages Posted: 25 Oct 2015

See all articles by Paul Fronstin

Paul Fronstin

Employee Benefit Research Institute (EBRI)

Dallas Salisbury

Independent

Jack VanDerhei

Morningstar Center for Retirement and Policy Studies

Date Written: October 1, 2015

Abstract

This paper updates previous estimates by the Employee Benefit Research Institute (EBRI) on savings needed to cover health insurance premiums and health care expenses in retirement. This report discusses the model used to estimate the amount of savings needed, the savings targets, and reasons for the recent increase in savings targets. This analysis does not factor in the savings needed to cover long-term care expenses. Medicare beneficiaries pay a share of their health expenses out-of-pocket because of program deductibles and other cost sharing. In 2015, a 65-year-old man needs $68,000 in savings and a 65-year-old woman needs $89,000 if each has a goal of having a 50 percent chance of having enough money saved to cover health care expenses in retirement. If either instead wants a 90 percent chance of having enough savings, $124,000 is needed for a man and $140,000 is needed for a woman. Savings targets increased from 6-21 percent between 2014 and 2015. For a married couple both with drug expenses at the 90th percentile throughout retirement who want a 90 percent chance of having enough money saved for health care expenses in retirement by age 65, targeted savings increased from $326,000 in 2014 to $392,000 in 2015. The main reason for the increase in needed savings is related to the adjustment that is made each year to rebaseline out-of-pocket spending associated with prescription drug use. As a result of the rebaselining, data on out-of-pocket spending for prescription drugs for 2012 and beyond have increased. The Patient Protection and Affordable Care Act (PPACA) is reducing cost sharing in the Medicare Part D coverage gap or so-called “donut hole.” By 2020, coinsurance in the coverage gap will be phased in to 25 percent. This year-to-year reduction in coinsurance will continue to reduce the savings needed for health care expenses in retirement, all else equal, for individuals with the highest drug use, which is one reason why this analysis finds past reductions in needed savings for health care expenses in retirement. Improvements in the outlook for growth in premiums related to the Medicare program also contributed to past declines in savings targets. However, more recently, these declines were offset by larger increases in out-of-pocket spending on prescription drugs as a result of rebaselining.

Note: The PDF for the above title, published in the October 2015 issue of EBRI Notes, also contains the full text of another October 2015 EBRI Notes article abstracted on SSRN: “How Does the Probability of a ‘Successful’ Retirement Differ Between Participants in Final-Average Defined Benefit Plans and Voluntary Enrollment 401(k)Plans?”

Keywords: Aged, Health care costs, Health insurance, Medicare, Medicare supplement insurance, Prescription drug costs, Savings

JEL Classification: H51, I1, I18, J14, J16

Suggested Citation

Fronstin, Paul and Salisbury, Dallas and VanDerhei, Jack, Amount of Savings Needed for Health Expenses for People Eligible for Medicare: Unlike the Last Few Years, the News Is Not Good (October 1, 2015). EBRI Notes, Vol. 36, No. 10 (October 2015), Available at SSRN: https://ssrn.com/abstract=2679023

Paul Fronstin (Contact Author)

Employee Benefit Research Institute (EBRI) ( email )

901 D St., SW
Suite 802
Washington, DC 20024
United States
202-775-6352 (Phone)
202-775-6312 (Fax)

Dallas Salisbury

Independent ( email )

Jack VanDerhei

Morningstar Center for Retirement and Policy Studies ( email )

22 W Washington Street
Chicago, IL 60602
United States

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