Start Saving Now: Retiree Health Care Costs Heading Higher
A new study that details the price we may all pay for our health care costs in retirement is sure to set off 
even the most tranquil of blood pressure readings. According to a report released yesterday by the non-partisan Employee Benefit Research Institute (EBRI), a 55-year old couple today that has the crazy idea they want to retire in 10 years and have a high probability that their retirement savings will cover all their health care costs -- to say nothing of the regular living costs, vacations, and grandchildren indulgences -- could need as much as $655,000. And that steep tab doesn't account for any long-term care costs you're likely to run into down the line.
What about Medicare coverage? Well, the EBRI estimates are for all costs above and beyond Medicare coverage, and include what beneficiaries currently subsidize through their premiums and deductibles.
However, the really sobering news is that EBRI's outsize estimates probably underplay the actual costs we might be facing. For all the political dissonance over how to deal with the federal deficit, the two main proposals floated to date -- by the President's deficit commission and the Bipartisan Policy Center -- both call for future Medicare beneficiaries to take on more of their retirement health care costs.
The Drug Factor
Okay, after all that cheery news, I figure I owe you some semblance of a silver lining. Here goes: Manage to steer clear of needing boatloads of pricey prescription drugs and your retirement health care costs could drop by 40 percent or more.
The number crunchers at EBRI break down potential health care costs across three broad scenarios:
- You're relatively healthy and your prescription drug costs will run right at the national median cost throughout your retirement.
- You'll have above-average prescription drug expenses that are at the 75th percentile of cost.
- You'll have the dreaded plethora of medical conditions that pushes your prescription drug costs into the 90th percentile.
That $655,000 tab I mentioned earlier is what it might cost a 55-year old couple today that retires in 10 years with very high drug expenses, and the couple wants a 90 percent probability they will be able to afford all their medical costs. Now if our retiring couple had the good constitution and good luck to keep their prescription drug costs at the national median, their total tab for retirement health care costs -- assuming a 90 percent probability of having enough saved -- falls to $387,000. I realize that still sounds steep, but it helps to keep in mind that the figure is for two people with an average life expectancy of about 20 years at age 65. That works out to an average of less than $10,000 a year per person in retirement.
Below is an EBRI breakdown of potential health care costs for a variety of scenarios. This chart assumes there are no retirement benefits being picked up by a former employer, which is probably a good assumption. Less than 25 percent of today's private-sector retirees have any health benefit, and even fewer future retirees can expect any such corporate largesse. (If you expect you will be among the lucky few to have retiree health benefit coverage, the full EBRI report includes cost estimates that factor in your subsidy.)
Note: Estimates for women are higher due to the longer life expectancy of women; three years on average.
Coping Strategies
We of course can't predict exactly what level of health care and prescription drugs we may need 10, 20, and 30 years down the line. But as the chart above shows, our out-of-pocket expenses are likely to fall into one of three categories: expensive, more expensive, or very, very expensive. Here are a few ways to plan accordingly:
- Use the catch-up contribution provision for your 401(k) and IRA. If you are at least 50 years old, you can contribute an additional $5,500 to your 401(k) in 2011 and an extra $1,000 to an IRA. A couple that manages to sock away an extra $13,000 a year in catch-up contributions from age 50 to 65 and earns 3 percent on the savings could have an extra $250,000 tucked away come retirement.
- Consider a Health Savings Account. If you're in pretty good health right now and your employer offers a high-deductible health insurance plan, consider opting for that so you can start to set aside money in a Health Savings Account. In 2011 you can contribute $3,050 ($6,150 per family) to an HSA. Any money you don't use to cover medical bills this year just rolls over and remains yours; in retirement that could help cover plenty of health care expenses.
- Plan to save even more money if you've got good genes. File this under damned-if-you-do, damned-if-you-don't: It turns out that the longer you live, the more likely it is that you will end up spending more on health care during your longer retirement. If your family has a history of outliving the average life expectancy charts, start saving more now.
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