The High Cost of Healthcare for Retirees

A study by the Employee Benefit Research Institute (EBRI) released in January estimates how much savings people need just to cover out of pocket healthcare expenses.  (You can see the entire study here)

Like our retirement planning software, the EBRI conducted Monte Carlo simulations to estimate the effect of varying mortality rates and portfolio returns.

The EBRI found that for a 65 year old man to have a 50/50 shot of having enough savings to cover his healthcare expenses, he needed to have $72,000 in the bank.  A 65 year old woman needs $93,000 to have the same chance of success.

Of course, a 50/50 chance is no better than a coin toss, so they did the same analysis to see how much money is needed to increase the odds to 90 percent.  It turns out that the savings needed for a man jumps to $127,000 and $143,000 for a woman (again, aged 65).

I’ve never seen healthcare costs laid out like this, in their present value terms.  While it’s interesting and immediately understandable, I also like the way that our financial planning software deals with the same issue.

Our software segregates healthcare cost needs from basic retirement living needs (as well as other wants and wishes) so that we can apply different rates of inflation to the data.

Over the last 45 years, the inflation rate for Medicare Part B costs was 7.9 percent, compared to 4.4 percent for overall inflation.  It’s been a little better for Part D and Medigap insurance, but not by much.

Personally, I prefer our methodology, but I also like seeing the lump sum of the future expenses in a single number.  In a sense, it doesn’t matter which method you use, as long as you’re specifically dealing with healthcare costs.

I was surprised to read that Medicare only covers about 62 percent of all healthcare costs that retirees will encounter.  That’s a large amount, but it still leaves you to cover the other 38 percent.

The EBRI also points out that this analysis doesn’t include everyone because it doesn’t factor in long-term care costs, which can obviously be substantial.

And the big curve ball that is barely mentioned in the analysis is that Medicare is running out of money.  The trustees for the program say that the trust fund will run out in 2030, only 13 years from now.

At that point, adjustments will have to be made that will undoubtedly include higher taxes and smaller benefits; so to be safe, it seems to me that saving a little more is a good idea.