The headline in a new report from EBRI says that when it comes to health expenses in retirement, ìSome Couples Could Need as Much as $370,000, Up from $350,000 in 2016.î But the real answer depends on some key assumptions and variables, not the least of which is how sure you want to be of covering those expenses.
The EBRI study looked specifically at expenses incurred for premiums for Medicare Parts B and D, premiums for Medigap Plan F, and out-of-pocket spending for outpatient prescription drugs. (Long-term care costs were not taken into consideration.)
The report notes that Medicare generally covers only about two-thirds of the cost of health care services for Medicare beneficiaries ages 65 and older, while out-of-pocket spending accounts for 12%.
Using data from a variety of sources in a Monte Carlo simulation model that simulated 100,000 observations (which allows for the uncertainty related to individual mortality and rates of return on assets in retirement), the researchers noted that:
- In 2017, a 65-year-old man needs $73,000 in savings and a 65-year-old woman needs $95,000 — if each has a goal of (only) having a 50% chance of having enough savings to cover premiums and median prescription drug expenses in retirement. If they want to improve those odds — say, to a 90% chance of having enough savings — the man needs $131,000 and the woman needs $147,000.
- Concerning the differences between men and women, as the report cautions, projections of savings needed to cover out-of-pocket expenses for prescription drugs are highly dependent on the assumptions used for drug utilization. Because women have longer life expectancies than men, women will generally need larger savings than men to cover health insurance premiums and health care expenses in retirement regardless of the savings targets.
- As for couples — well, a couple with median prescription drug expenses needs $169,000 if they have a goal of having that 50% chance of having enough savings to cover health care expenses in retirement, whereas if they want a 90% chance of having enough savings, they need $273,000.
But Wait — Where's the $370,000?
Now, that was at the median. If, on the other hand, you have a couple with drug expenses at the 90th percentile throughout retirement who want a 90% chance of having enough money saved for health care expenses in retirement by age 65 ó thatís the $370,000 number from the EBRI headline (targeted savings of $368,000 in 2017).
There has been some movement in these numbers: EBRI notes that the savings targets declined between 2011 and 2014, and then increased from 2014 to 2016, and again from 2016 to 2017, with increases as large as 6% in some cases. For example, a couple with drug expenses at the 90th percentile throughout retirement who wanted a 90% chance of having enough money saved for health care expenses in retirement by age 65 would have seen their targeted savings increase 5% ó from $349,000 in 2016 to $368,000 this year.
What accounts for that increase? While the EBRI model includes several factors that could result in an increase or decrease in targeted savings, the researchers explain that the main reason for the increase in needed savings from 2015 to 2017 is related to the adjustment that is made each year to reestablish the baseline for out-of-pocket spending associated with prescription drug use.
From 2016 to 2017, projected savings targets increased between 1% and 6%. In contrast, savings targets declined between 2011 and 2014, but then increased from 2014 to 2016 as well. However, EBRI notes that despite the increase in savings targets since 2014, the 2017 savings targets continue to be lower than they were in 2012, almost across the board.
It's worth remembering, however, that while it is possible to come up with a single number that individuals can use to set retirement savings goals, a single number based on averages will be wrong for the vast majority of the population.