Savings Needed to Fund Health Insurance and Health Care Expenses in Retirement: Findings from a Simulation Model

28 Pages Posted: 31 May 2008

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: May 2008

Abstract

This paper provides estimates for savings needed to cover health insurance to supplement Medicare and out-of-pocket expenses for health care services in retirement. It finds that a male age 65 in 2008 and retiring at age 65 will need anywhere from $64,000 to $159,000 in savings to cover health insurance premiums and out-of-pocket expenses in retirement if they are comfortable with a 50 percent chance of having enough money and $196,000 to $331,000 if they prefer a 90 percent chance. Women age 65 retiring in 2008 will need anywhere from $86,000 to $184,000 in savings to cover health insurance premiums and out-of-pocket expenses in retirement if they are comfortable with a 50 percent chance of having enough money, and $223,000 to $390,000 if they prefer a 90 percent chance. Persons currently age 55 will need even greater savings when they turn 65 in 2018.

Past EBRI research has examined how much money an individual needs for health care expenses in retirement, focusing on how savings varies by length of life and health care cost increases. Past research was based on computer modeling that used deterministic (non-random) analytical techniques. The research presented in this paper builds on that earlier work by introducing random (stochastic) computer modeling to more realistically examine the uncertainty of longevity and investment risk as well as future health care cost increases. This paper begins with a brief discussion of the modeling technique, followed by main findings and updated data on trends in retiree health benefits.

Keywords: Employment-based benefits, Health care costs, Health insurance, Medicare, Medicare supplement insurance, Prescription drug costs, Public employees, Retiree health benefits, Savings, State and local employees

JEL Classification: H51, I1, J14, J32

Suggested Citation

Fronstin, Paul and Salisbury, Dallas and VanDerhei, Jack, Savings Needed to Fund Health Insurance and Health Care Expenses in Retirement: Findings from a Simulation Model (May 2008). EBRI Issue Brief, No. 317, May 2008, Available at SSRN: https://ssrn.com/abstract=1139175

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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