Needed health savings in retirement increases due to drug costs

Projected savings targets needed to cover health care in retirement went up last year after several years of decline, but are still generally lower than they were five years ago, according to recent research from the Employee Benefit Research Institute (EBRI).

In the latest annual update of its retiree health savings analysis, EBRI found that the range of retiree health savings targets rose between 0‒6 percent between 2015 and 2016. While there are various factors at play, “the main reason for the increase in needed savings is related to the yearly adjustment for out-of-pocket spending for prescription drug use,” said Paul Fronstin, director of EBRI’s Health Research and Education Program. Because actual out-of-pocket spending for prescription drugs in the most recent data turned out to be higher, future estimates have gone up.

Since the EBRI analysis does not factor in the savings needed to cover such things as long-term care expenses, retirement earlier than becoming eligible for Medicare, and higher Medicare premiums related to higher income, “many individuals will need more than the amounts cited in this report,” Fronstin said.

Conversely, he added some workers will need to save less than what is reported if they choose to work past age 65, thereby postponing enrollment in Medicare if they receive health benefits as active workers.

The range of increases depends on how much health expenses a person is likely to have and how high a probability they want to have enough money on hand. Specifically, EBRI found, in 2016, a 65-year-old man would need $72,000 in savings and a 65 year-old woman would need $93,000 if each had a goal of having a 50 percent chance of having enough savings to cover health care expenses in retirement. If they wanted a 90 percent chance of having enough savings, the man would need $127,000 and the woman would need $143,000.

Not surprisingly, those with high prescription drug costs would need to save substantially more. For a married couple both with drug expenses at the 90th percentile throughout retirement who want a 90 per-cent chance of having enough money saved for health care expenses in retirement by age 65, targeted savings would be $349,000 in 2016.


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