Savings needed to fund health insurance and health care expenses in retirement: findings from a simulation model.
MODELING RETIREE HEALTH COSTS: This Issue Brief examines the uncertainty of health care expenses in retirement by using a Monte Carlo simulation model to estimate the amount of savings needed to cover health insurance premiums and out-of-pocket health care expenses. This type of simulation is able to account for the uncertainty related to individual mortality and rates of return, and computes the present value of the savings needed to cover health insurance premiums and out-of-pocket expenses in retirement. These observations were used to determine asset targets for having adequate savings to cover retiree health costs 50, 75, and 90 percent of the time. NOT ENOUGH SAVINGS: Many individuals will need more money than the amounts reported in this Issue Brief because this analysis does not factor in the savings needed to cover long-term care expenses, nor does it take into account the fact that many individuals retire prior to becoming eligible for Medicare. However, some workers will need to save less than what is reported if they keep working in retirement and receive health benefits as active workers. WHO HAS RETIREE HEALTH BENEFITS BEYOND MEDICARE?: About 12 percent of private-sector employers report offering any Medicare supplemental health insurance. This increases to about 40 percent among large employers. Overall, nearly 22 percent of retirees age 65 and older had retiree health benefits in 2005 to supplement Medicare coverage. As recently as 2006, 53 percent of retirees age 65 and older were covered by Medicare Part D, 24 percent had outpatient prescription drug coverage through an employment-based plan. Only 10 percent had no prescription drug coverage. INDIVIDUALLY PURCHASED MEDICARE SUPPLEMENTS, 2008: Among those who purchase Medigap and Medicare Part D prescription drug coverage at age 65 in 2008, men would need between $79,000 and $159,000 with median prescription drug expenses (50th percentile and 90th percentiles, respectively), and between $156,000 and $331,000 with prescription spending that is at the 90th percentile. Women would need between $108,000 and $184,000 with median prescription drug expenses (50th and 90th percentiles, respectively), and between $217,000 and $390,000 with prescription spending that is at the 90th percentile. The savings needed for couples would range from $194,000 at the 50th percentile to $635,000 at the 90th percentile. EMPLOYMENT-BASED BENEFITS, 2008: Among those who have employment-based retiree health benefits to supplement Medicare, but who must pay their own premiums, men would need between $102,000 and $196,000 in current savings (50th and 90th percentiles, respectively) to cover health care costs in retirement. Women would need between $137,000 and $224,000, respectively, due to their greater longevity. The savings needed for couples would range from $154,000 to $376,000. INDIVIDUALLY PURCHASED MEDICARE SUPPLEMENTS, 2018: Among those who purchase Medigap and Medicare Part D prescription drug coverage at age 65 in 2018 (currently age 55), men would need between $132,000 and $266,000 with median prescription drug expenses (50th and 90th percentiles, respectively), and between $261,000 and $555,000 with prescription spending that is at the 90th percentile. Women would need between $181,000 and S308,000 with median prescription drug expenses (50th and 90th percentiles), and between S364,000 and $654,000 with prescription spending that is at the 90th percentile. The savings needed for couples would range from $325,000 at the 50th percentile to S1,064,000 at the 90th percentile. RETIREE HEALTH MAY BE DRIVING LONGER TIME IN THE WORK FORCE: The declining availability of retiree health benefits may partly explain the rising labor force participation rate among individuals ages 55-64. Between 1996 and 2006, the labor force participation rate increased from 67 percent to 69.6 percent for men and from 49.6 percent to 58.2 percent for women.
Fronstin
Paul
P
Health Research and Education Program, Employee Benefit Research Institute, Washington, DC 20005, USA.
Salisbury
Dallas
D
VanDerhei
Jack
J
D000368:Aged; D005260:Female; D006264:Health Benefit Plans, Employee; D017048:Health Care Costs / Q000706:statistics & numerical data; D005102:Health Expenditures; D006801:Humans; D007348:Insurance, Health / Q000191:economics* / Q000639:trends; D017054:Insurance, Medigap / Q000191:economics / Q000706:statistics & numerical data; D008297:Male; D006278:Medicare / Q000191:economics / Q000706:statistics & numerical data / Q000639:trends; D008875:Middle Aged; D010415:Pensions / Q000706:statistics & numerical data; D017149:Private Sector; D012179:Retirement / Q000191:economics* / Q000706:statistics & numerical data; D013221:State Health Plans; D014481:United States