Estimates Show More Precise Retiree Health Savings Needs

Armen Hareyan's picture
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The nonpartisan Employee Benefit Research Institute (EBRI) published a new, more comprehensive set of estimates of the amount of money individuals and couples will need to cover certain health care expenses in retirement. The new estimates attempt to provide more information to allow men, women, and couples to deal with the financial consequences of longevity and investment risk as well as the various types of medical care coverage available when they reach age 65.

The new estimates, published in the May 2008 EBRI Issue Brief, use a Monte Carlo (random) simulation model to estimate the amount of savings needed to cover health insurance premiums and out-of-pocket health care expenses in retirement.

Separate estimates are presented for individuals and couples who supplement Medicare with employment-based retiree health benefits and for those who use a combination of individual health insurance through Medigap and Medicare Part D outpatient drug coverage.

In each case, estimates are presented for individuals and couples to determine the assets needed to cover retiree health costs 50 percent, 75 percent, and 90 percent of the time. The estimates vary widely, depending on how much risk the individual or couple is willing to assume. For example, the amount of money needed to cover these costs under "average" conditions (the 50 percent figure) is much smaller than the 90 percent figure; however, in the 50 percent case, assets will be insufficient half of the time, as opposed to only 10 percent of the time under the higher figure.

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Here are the results:

Employment-based benefits, with premiums subsidized by a former employer:

This example assumes a 65-year-old individual supplements Medicare with retiree health benefits from a former employer and that the premiums are subsidized by a former employer (see figure below). The savings needed are:

Man: A man would need $64,000 in current savings to have a 50 percent chance of having enough money to cover health care expenses in retirement, or $122,000 in current savings for a 90 percent chance of having enough to cover retiree health costs.

Woman: A woman would need current savings of $86,000 to have a 50 percent chance of having enough money for retiree health expenses, or $140,000 to have a 90 percent chance of having enough to cover retiree health costs. The numbers are higher for women because of their greater longevity.

Married couple: A married couple would need current savings of $154,000 to have a 50 percent chance of having enough money for retirement health costs, or $235,000 for a 90 percent chance.

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