New Research from EBRI: Needed Health Savings in Retirement Going Up Due to Drug Costs

WASHINGTON, Jan. 31 -- The Employee Benefit Research Institute issued the following news release:

Projected savings targets needed to cover health care in retirement went up last year after several years of decline, but are still generally lower than they were five years ago, according to new research by the nonpartisan Employee Benefit Research Institute (EBRI).

In the latest annual update of its retiree health savings analysis, EBRI found that the range of retiree health savings targets rose between 0 6 percent between 2015 and 2016. While there are various factors at play, "the main reason for the increase in needed savings is related to the yearly adjustment for out-ofpocket spending for prescription drug use," said Paul Fronstin, director of EBRI's Health Research and Education Program and co-author of the report. Because actual out-of-pocket spending for prescription drugs in the most recent data turned out to be higher, future estimates have gone up.

Since the EBRI analysis does not factor in the savings needed to cover such things as long-term care expenses, retirement earlier than becoming eligible for Medicare, and higher Medicare premiums related to higher income, "many individuals will need more than the amounts cited in this report," Fronstin said.

Conversely, he added some workers will need to save less than what is reported if they choose to work past age 65, thereby postponing enrollment in Medicare if they receive health benefits as active workers. The range of increases depends on how much health expenses a person is likely to have and how high a probability they want to have enough money on hand. Specifically, EBRI found, in 2016, a 65-year-old man would need $72,000 in savings and a 65 year-old woman would need $93,000 if each had a goal of having a 50 percent chance of having enough savings to cover health care expenses in retirement. If they wanted a 90 percent chance of having enough savings, the man would need $127,000 and the woman would need $143,000.

Not surprisingly, those with high prescription drug costs would need to save substantially more. 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 would be $349,000 in 2016.

EBRI's latest analysis updates its previous estimates on savings needed to cover health insurance premiums and health care expenses in retirement. As before, it points out that projections of savings needed to cover out-of-pocket expenses for prescription drugs are highly dependent on the assumptions used for drug utilization, which is why the analysis provides three sets of estimates: prescription drug use is at the median (mid-point, half above and half below) throughout retirement; prescription drug use at the 75th percentile throughout retirement; and in prescription drug use is at the 90th percentile throughout retirement.

As Fronstin noted, Medicare was never designed to cover health care expenses in full. In 2013, Medicare covered 62 percent of the cost of health care services for Medicare beneficiaries ages 65 and older, while out-of-pocket spending accounted for 13 percent, and private insurance covered 13 percent.

The full report, "Savings Medicare Beneficiaries Need for Health Expenses: Some Couples Could Need as Much as $350,000," is published in the Feb. 1, 2017 EBRI Notes, online at www.ebri.org

The Employee Benefit Research Institute is a private, nonpartisan, nonprofit research institute based in Washington, DC, that focuses on health, savings, retirement, and economic security issues. EBRI conducts objective research and education to inform plan design and public policy, does not lobby and does not take policy positions. The work of EBRI is made possible by funding from its members and sponsors, which include a broad range of public, private, for-profit and nonprofit organizations. For more information go to www.ebri.org or www.asec.org

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