Estimated health care expenses in retirement increase again: EBRI

Men on Medicare would need as much as $184,000 to have a 90 percent chance of meeting their health care costs, and women as much as $217,000.

Americans who are enrolled in Medicare will likely need to accumulate more savings to pay for their health care costs in retirement than they expected, a new report finds.

According to the report from the Employee Benefit Research Institute, projected health care costs for Medicare beneficiaries increased again in 2023. Such costs include premiums, deductibles, and prescription drugs in retirement.

When the Medicare program was created back in 1965, it wasn’t “designed to cover health care costs in full,” EBRI said in the report, and “the program continues to impose cost sharing on beneficiaries when they use health care services.”

Mary Beth Franklin, former columnist and contributing editor for InvestmentNews, said the report validates earlier studies that show the biggest expenses in retirement are related to health care.

“Even though people are fortunate enough to have Medicare, they also usually need either a Medigap policy or a Medicare Advantage plan and often a prescription drug plan,” Franklin says. “All those costs don’t cover things like long-term care insurance.”

The EBRI study found that a 65-year-old man enrolled in a Medigap plan with average premiums will need to have saved $106,000 to have a 50 percent chance of having enough to cover premiums and median prescription drug expenditures, and a woman will need to have saved $128,000.

To have a 90 percent chance of meeting their health care spending needs in retirement, a man will need to have saved $184,000, and a woman will need to have saved $217,000. Couples enrolled in a Medigap plan with average premiums, meanwhile, will need to have saved $234,000 to have a 50 percent chance of covering their medical expenditures in retirement and $351,000 to have a 90 percent chance.

Franklin said that it will be difficult for retirees and pre-retirees to earmark funds specifically for health care costs, and that they’ll have to try to “grow their portfolios with their goals in mind and the fact that they will need income and hopefully they will have assets that they can rely on for it.”

Some groups, Franklin added, like HealthView Services, recommend specific investments to be earmarked for health care costs if necessary.

She said that advisors should encourage clients to enroll in Medicare as soon as they’re eligible, which in most cases is at age 65. If they don’t, they risk having to pay lifelong delayed enrollment penalties.

“The exception is if people continue to work past age 65 and are covered by their employer’s group health insurance, they can delay enrolling in Medicare penalty-free until that insurance ends,” Franklin added.

Clients should also buy the best and most affordable Medigap policy when they’re first eligible. They can trade down for a better plan later, but it’s “almost impossible to trade up,” Franklin warns.

“You only have the first six months where you can choose any Medigap policy and not be denied,” she said. “After that initial period expires, then you’re subject to medical underwriting and it can be difficult to get a plan you want later.”

“Advisors are wise to either partner with health cost experts or have someone that they can refer their clients to make sure they’re getting good information when they’re making Medicare and Medigap decisions,” Franklin added.

RETIREE HEALTH BENEFITS

“One of the reasons we focus on how much individuals need to save for health care expenses in retirement is because fewer and fewer employers are offering retiree health benefits,” Jake Spiegel and Paul Fronstin, authors of the study, wrote in the report. “As a result of the decline in the percentage of employers offering coverage, the percentage of workers at firms that offer coverage has declined as well.”

The 16-page analysis found that in 2022, 12 percent of workers were employed at establishments that offered health coverage to early retirees, down from 29 percent in 1997, according to the EBRI. Similarly, 7 percent of workers were employed at establishments that offered health coverage to Medicare-eligible retirees, down from 25 percent in 1997.

“Many of these workers will not be eligible for retiree health coverage for several reasons. They may be part-time workers; they may not have had enough years of service to qualify for the benefit; or new hires may not be eligible for coverage,” the report said.