Funding Savings Needed for Health Expenses for Persons Eligible for Medicare

December 2010
EBRI Issue Brief #351
Paperback, 16 pp.
PDF, 539 kb
Employee Benefit Research Institute, 2010

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Executive Summary

UPDATED MODELING: This report updates earlier modeling by EBRI on the level of savings needed for health care expenses in retirement. Some prior estimates have been significantly revised down as a result of changes to Medicare Part D cost sharing that will be phased in by 2020 due to recently enacted health reform. However, the research indicates that retirees will continue to need a substantial amount of savings to cover their health care expenses in retirement, and that uncertainty related to health care use, prescription drug use, and longevity will still play a major role in planning for retiree health care. As before, EBRI’s research shows that women will need significantly higher levels of savings than men, due to their greater longevity. Results are shown by the desired level of probability (50, 75, and 90 percent) of having enough savings to cover health costs in retirement.

SAVINGS TO SUPPLEMENT MEDICARE WITH MEDIGAP AND PART D: EBRI finds that a man with median drug expenditures would need $65,000 in savings and a woman would need $93,000 if they want an average (50 percent) chance of having enough money to cover health care expenses in retirement. For a higher (90 percent) chance of having enough, a man would need $124,000 and a woman $152,000. A couple both with median drug expenses would need $158,000 for a 50 percent chance of having enough money, and $271,000 for a 90 percent chance. At the highest (90th percentile) level of drug spending, a man would need $187,000 and a woman $213,000 to have a 90 percent chance of having enough money to cover health care expenses in retirement.

SAVINGS TO SUPPLEMENT MEDICARE WITH SUBSIDIZED EMPLOYMENT-BASED COVERAGE: A 65-year-old man retiring in 2010 with retiree health benefits from a former employer will need $66,000 to have a 50 percent chance of having enough savings to cover health care expenses in retirement; for a 90 percent chance, he would need $125,000. Women would need $88,000 and $143,000, respectively. Few employers continue to provide subsidized retiree health coverage.

SAVINGS TO SUPPLEMENT MEDICARE WITH EMPLOYMENT-BASED COVERAGE WITHOUT SUBSIDY: Retirees who have employment-based retiree health benefits to supplement Medicare and whose former employer does not subsidize premiums will need to save more money than retirees whose premiums are subsidized. A man without subsidized premiums would need $109,000 in savings to cover health care costs in retirement if he wants a 50 percent chance of having enough money to cover health care expenses in retirement, while a woman would need $146,000. To have a 90 chance of having enough savings to cover health care costs in retirement, a man would need $211,000 and a woman would need $242,000 if the benefit is through a former employer and not subsidized.

WIDE VARIATION IN MEDIGAP PREMIUMS AFFECTS SAVINGS TARGETS: There is wide variation in Medigap premiums. The average premium was $1,479 for Plan F in 2010, but Connecticut had the highest average premium for Plan F at $2,493. Indiana has the higher premium variation, with at least one plan offering Plan F at a premium of $14,604.