Financial Planning, Retirement

Many Americans Underestimate This Retirement Expense

11/2/18 8:00 AM

iStock-626627280.jpgHealthcare costs continue to rise rapidly, and pre-retirees cannot afford to assume that Medicare will be able to cover all of their medical bills in old age. In fact, this government program was never designed to pay Americans’ healthcare expenses in full, and Medicare covered just 60 percent of the cost of medical services for beneficiaries ages 65 and older in 2015, according to the most recent data from the U.S. Department of Health and Human Services. To pay for the rest of their healthcare outlays, retirees typically have to rely on private insurance coverage and out-of-pocket spending, and as we learned recently, such expenses can be significant.

An updated study by the Employee Benefits Research Institute similarly estimated that a 65-year-old man (woman) would need $75,000 ($99,000) in savings just to achieve a coin flip chance of having enough money to cover premiums and prescription drug costs in retirement. For a 90 percent confidence level, those estimates jump to $148,000 for a man and $161,000 for a woman, and all of the above figures are marked increases from the prior year’s projections. With Medicare Parts A and B, retirees can find help through the purchase of Medigap insurance that allows them to avoid deductibles and other cost-sharing. It is not possible, though, to completely avoid the deductible and other cost-sharing associated with Part D outpatient prescription drugs.


Specifically, Medicare beneficiaries under Part D are responsible for a 25 percent coinsurance on expenses between the deductible and the initial benefit limit. Once the initial benefit limit is reached, beneficiaries are essentially responsible for everything until they reach the catastrophic limit, above which they pay a 5 percent coinsurance. Those additional prescription outlays can be quite large, and the EBRI researchers calculated that a married couple with relatively high (90th percentile) drug expenses throughout retirement could need as much as $399,000 in savings to be somewhat certain that they will be able to cover all of their healthcare costs in old age, up from $368,000 in the 2017 analysis.

What is worse is that the EBRI’s estimates do not even include any expenses associated with long-term care, a growing financial risk that 44 percent of Americans surveyed by Transamerica said is one of their greatest retirement fears at the moment. Only a reduction in their Social Security benefits and outliving their savings were more frequently cited by respondents as a top retirement concern. Such statistics only increase the importance of utilizing every tax-advantaged savings vehicle available, e.g. 401(k)s, IRAs, and HSAs, and regularly working with a professional financial advisor to make sure that you remain on track to achieve the comfortable and secure retirement you deserve.



Sources: U.S. HHS, EBRI, TCRS

Post author: Charles Couch