Many pre-retirees assume that Medicare will be able to cover all of their healthcare bills in old age, but this government program was never designed to pay for everyone’s old-age medical expenses in full. In reality, Medicare usually covers just 61 percent of the cost of healthcare services for Medicare beneficiaries ages 65 and older, according to the latest data from the U.S. Department of Health and Human Services (see below), while the rest is typically paid for by private insurance coverage and out-of-pocket spending. These potential outlays should be incorporated into one’s retirement plan, especially given how significant healthcare expenses can often be.
A recently-updated study by the Employee Benefits Research Institute (EBRI), for instance, estimated that a 65-year-old man (woman) in 2020 would need $73,000 ($95,000) in savings just to achieve a 50 percent (coin flip) chance of having enough money to cover all healthcare expenses in retirement, e.g. premiums and prescription drug costs. For a 90 percent confidence level those figures jump to $130,000 for a man and $146,000 for a woman (higher because of a longer life expectancy). Compared to the 2019 estimates, though, the above figures actually represent the largest annual decrease in nearly a decade. One possible explanation for the sharp drop could be that healthcare spending in general has fallen considerably this year as the coronavirus and related lockdowns have dramatically altered the way many Americans seek medical care. For example, some people are relying more on cheaper remote options such as telemedicine, while others have opted to avoid routine screenings and other non-urgent care.
A recent Milliman study even estimated that nationwide healthcare outlays could be reduced by more than half a trillion dollars this year due solely to COVID-19. Since a lot of these disruptions should prove transitory, it is very possible that the estimated savings targets resume their march higher in the years ahead. What is worse is that the EBRI’s calculations are conservative in that they do not even account for expenses associated with long-term care, a growing financial risk that we learned earlier this year is a major old-age fear for 4 in 10 retired Americans. Encouragingly, younger adults have become increasingly aware of this potentially significant retirement outlay, and a recent MassMutual poll even found that 42 percent of workers ages 30 to 40 years old, and 36 percent for those ages 41 to 50, already expressed an interest in purchasing insurance to protect against long-term care expenses.
Sources: U.S. HHS, EBRI, Milliman, MassMutual