Retiree Health Care Cost Estimates Still Induce Sticker Shock

While the Inflation Reduction Act of 2022 attempts to help stem the tide from escalating retiree health care costs, new estimates show that the typical retired couple can still expect to pay far north of six figures for health care costs in retirement.   

In fact, the research by the Employee Benefit Research Institute (EBRI) found that some couples potentially may need as much as $383,000 for health care costs during their retirement years.

To project how much Medicare beneficiaries may need to save, EBRI updated its simulation model by incorporating the changes under the Inflation Reduction Act and testing varying assumptions about Medicare Advantage and Medigap plans that Medicare beneficiaries may purchase.

The Inflation Reduction Act capped Medicare Part D out-of-pocket spending at $2,000 starting in 2025, but despite the introduction of the cap, individuals may have to pay greater shares of their overall health costs in retirement because of the financial condition of Medicare and cutbacks to employment-based retiree health programs.

Medigap vs. Medicare Advantage

Not surprisingly, EBRI finds that the predicted savings target for Medicare beneficiaries to cover premiums, deductibles, and prescription drugs in retirement remains high, and is sensitive to assumptions about premiums, prescription drug expenses, and usage of health care services.

For instance, a 65-year-old man enrolled in a Medigap plan with average premiums will need to have saved $96,000 to have a 50% chance of having enough to cover premiums and median prescription drug expenditures, and a woman will need to have saved $116,000. To have a 90% chance of meeting their health care spending needs in retirement, a man will need to have saved $166,000, and a woman will need to have saved $197,000.

Couples enrolled in a Medigap plan with average premiums, meanwhile, will need to have saved $212,000 to have a 50% chance of covering their medical expenditures in retirement and $318,000 to have a 90% chance.

Representing an extreme case, couples with particularly high prescription drug expenditures will need to have saved $383,000 to have a 90% chance of having enough money to cover their health care costs in retirement.

Meanwhile, enrollees in Medicare Advantage plans generally have lower savings targets, although there is significant individual-level variation. For example, a man enrolled in Medicare Advantage who has median drug expenditures and an average usage of health care services will need to have saved $56,000 to have a 50% chance of meeting their health care spending requirements in retirement, and he would need $96,000 to have a 90% chance.

In contrast, a woman will need to have saved $67,000 to have a 50% chance and $113,000 to have a 90% chance of having enough to cover her health care costs in retirement. Couples will need to have saved $123,000 to have a 50% chance and $184,000 to have a 90% chance of covering their health care expenditures in retirement.

Of course, there are other factors to consider when it comes to choosing a plan, EBRI reminds readers. For example, enrollees generally trade lower premiums for higher out-of-pocket spending, and some Medicare Advantage plans have narrower networks.

Note also that the analysis also does not factor in the total savings needed to cover long-term-care expenses and other health expenses not covered by Medicare, nor does it take into account the fact that many individuals retire before becoming eligible for Medicare.