As the average life expectancy continues to increase, more and more Americans are growing concerned about outliving their retirement savings. Evidence of this could be seen in a 2015 poll conducted by the American Institute of CPAs (AICPA) which found that running out of money was the top retirement-related worry for working-age adults. Fortunately, many expenses actually decline during retirement, which can put less strain on one’s savings.
For example, a U.S. Government Accountability Office (GAO) study estimated that after retirement, the average 65- to 79-year-old's household spending falls to $41,904 a year, only 77 percent of the average annual outlays for adults ages 50 to 64. This decline, according to the GAO researchers, is due to lower overall spending in seven key categories (see below). However, the one outlay that does tend to rise for most retirees is healthcare.
Indeed, people are living longer than ever before but this is in part due to rapid medical innovations which typically are not available for free. In fact, Fidelity Investments estimates that a 65-year-old couple retiring this year will need to have around $260,000 just to cover their healthcare costs in old age. That is a 6 percent increase over the previous year’s projection and the highest estimate since Fidelity’s calculations began in 2002.
Even a somewhat more optimistic analysis by the Employee Benefit Research Institute (EBRI) estimated that a 65-year-old man (woman) would still need $68,000 ($89,000) in savings just to obtain a coin-flip chance of having enough money to cover probable healthcare expenses in retirement. Medicare can of course help considerably when it comes to covering such outlays but retirees must still deal with Medicare premiums, copayments, deductibles, and out-of-pocket prescription drug expenses.
Aware of these additional costs, many retirees are turning to Medicare Advantage plans, which are like HMOs or PPOs that provide basic Medicare Part B coverage as well as some of the benefits offered by supplementary Medigap policies. Advantage plans are popular because the premiums for an Advantage plan plus Medicare Part B coverage are roughly half, on average, the premiums for a Medigap policy plus Part B. However, overlooked pitfalls often associated with these plans (relative to Medigap policies) include limited coverage of out-of-pocket healthcare costs, and greater network restrictions on hospitals and physicians.
Another Medicare-related issue for some Americans to be aware of is that a greater premium surcharge is coming for wealthier retirees in 2018. The income thresholds for these surcharges are not indexed to inflation, meaning that the overall number of Medicare recipients who owe these fees should also rise. If possible, taking a larger portion of one’s annual retirement income from a Roth-style savings plan could help in avoiding such surcharges because payouts from these accounts often are not taxable, and therefore do not raise your adjusted gross income (AGI).
Sources: U.S. GAO, Investor’s Business Daily, NAPA, Fidelity Investments, EBRI, Boston College (CRR), Squared Away, KFF, Wall Street JournalPost author: Charles Couch