Amount of Savings Needed for Health Expenses for People Eligible for Medicare: Good News Not So Rare Anymore

Abstract

This paper updates previous estimates by the Employee Benefit Research Institute (EBRI) using a Monte Carlo simulation model to estimate the amount of savings needed to cover health insurance premiums and out-of-pocket health care expenses in retirement.

Savings targets declined between 2 percent and 10 percent between 2013-2014. This report discusses the model, the savings targets, and continued reasons for the decline in savings targets. Estimates are presented for those who supplement Medicare with a combination of individual health insurance through Medigap Plan F coverage and Medicare Part D for outpatient prescription drug coverage. Medicare beneficiaries can expect to pay a share of their costs out of pocket because of program deductibles and other cost sharing. Separate estimates are presented for men and women. In 2014, a man would need $64,000 in savings and a woman would need $83,000 if each had a goal of having a 50 percent chance of having enough money saved to cover health care expenses in retirement. If either instead wanted a 90 percent chance of having enough savings, $116,000 would be needed for a man and $131,000 would be needed for a woman. For a married couple both with drug expenses at the 90th percentile throughout retirement who wanted a 90 percent chance of having enough money saved for health care expenses in retirement by age 65, targeted savings fell from $360,000 in 2013 to $326,000 in 2014. The Patient Protection and Affordable Care Act is reducing cost sharing in the Part D coverage gap or so-called “donut hole”; by 2020, co-insurance in the coverage gap will be phased in to 25 percent. This year-to-year reduction in co-insurance will continue to reduce the savings needed for health care expenses in retirement, all else being equal, for individuals with the highest drug use, which is one reason why this analysis finds reductions in needed savings for health care expenses in retirement. Improvements in the outlook for growth in premiums and other costs related to the Medicare program also contributed to the decline in savings targets. However, it should be noted that many individuals will need more than the amounts cited in this report. This analysis does not factor in the savings needed to cover long-term care expenses, nor does it take into account the fact that many individuals retire prior to becoming eligible for Medicare. However, some workers will need to save less than what is reported if they choose to work past age 65, thereby postponing enrollment in Medicare Parts B and D if they receive health benefits as active workers.

The PDF for the above title, published in the October 2014 issue of EBRI Notes, also contains the fulltext of another October 2014 EBRI Notes article abstracted on SSRN: “IRA Asset Allocation, 2012, and Longitudinal Results, 2010-2012.”

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

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