Rising Health Care Costs in Retirement: Americans Need $351,000 to Cover Expenses
Retirement is often seen as a time to relax and enjoy the fruits of one’s labor. However, recent research suggests that Americans may need to save a significant amount of money just to cover their health care costs in retirement. According to a report by the nonpartisan, nonprofit Employee Benefit Research Institute (EBRI), retirees may need as much as $351,000 to cover expenses such as Medicare premiums and out-of-pocket costs for drugs.
The research highlights the alarming lack of retirement savings among Americans. A survey conducted by New York Life revealed that only 4 in 10 adults have a nest egg, despite 74% of them expecting to retire at the age of 64. This shortfall in savings means that many retirees may find themselves facing financial stress during their golden years.
“People have so many different financial goals pulling them in a million different directions that they don’t always realize how high health care costs can be,” says Jake Spiegel, an associate at EBRI and co-author of the health care savings report.
So, how much should individuals save for health care in retirement? The report suggests that for a 90% chance of meeting their health care expenses, including premiums and out-of-pocket costs, a 65-year-old man with average premiums will need $184,000 in savings, while a woman will need $217,000. Couples, on the other hand, will need a staggering $351,000. In extreme cases where couples have expensive prescription drugs, the figure rises to $413,000.
It’s important to note that these estimates do not include services not covered by Medicare, such as dental, vision, or hearing. They also do not account for long-term care costs, which can be “enormous,” according to Spiegel. A survey by senior-living finder Seniorly reveals that monthly assisted living costs can reach $8,248, while in-home care can total $3,861. These costs pose a significant challenge for the average American, who would need 17.2 years to save for just one year of assisted living.
The high health care costs for retirees can be attributed to various factors. Medicare premium increases, the program’s uncertain financial footing, and cutbacks in employment-based retiree health programs all contribute to the rising costs. Over the past two decades, health care costs have outpaced inflation significantly. Medical care costs, including services, insurance, drugs, and equipment, have risen by 114.3% from January 2000 to June 2023, compared to an 80.8% increase in prices for all consumer goods and services.
Mary Johnson, a Social Security and Medicare policy analyst at The Senior Citizens League, explains that “health care costs tend to increase two or three times faster than the (cost of living) increases in Social Security income.” A recent survey by the league found that one in five seniors spends more than $1,000 a month on health care.
The lack of savings to meet these costs not only affects retirees but also has far-reaching consequences for their family members who may want to provide assistance. “There are so many retirees who just don’t have the savings to meet these costs,” says Johnson.
To help ease the burden for seniors, financial advisers and health care experts suggest several moves. Legislative changes, such as reduced benefits or increased taxes on workers, could help shore up Medicare’s financial stability. Early planning is also crucial, including putting money into a health savings account (HSA), modifying homes to accommodate aging in place, and saving money. Additionally, considering long-term health insurance or opting for Medicare Advantage (Medicare Part C) can provide alternative options. Medicare Advantage plans often have a $0 premium and offer benefits like dental, vision, and audio services. However, it’s important to note that these plans may have limited networks or require approval for certain medications or services.
The rising health care costs in retirement highlight the need for individuals to plan and save adequately. It is crucial to be aware of the potential financial burden and take proactive steps to ensure a comfortable retirement. By understanding the costs involved and exploring various options, retirees can better prepare themselves for the challenges that lie ahead.