Savings targets for retirement health care costs fall in 2014

Retirees who are eligible for Medicare this year won’t need to stash quite as much money in order to cover their future healthcare expenses — for now.
Data from the Employee Benefit Research Institute shows that savings targets to fund health care costs in retirement fell by as much as 10% between 2013 and 2014.
That means that a married couple with drug expenses in the 90th percentile who wanted a 90% chance of having sufficient savings for health care costs in retirement at age 65 will need to have $326,000 saved in 2014. That’s down fairly significantly from the $360,000 needed last year.
“While there’s good news that the number has come down a little bit, it’s still a high number,” said author Paul Fronstin, director of EBRI’s Health Research and Education Program. “For many it’s still a stretch to save.”
Separately, if a man with median prescription drug expenses wanted to have a 90% chance of having enough money to cover health care costs in retirement at age 65, he would need $116,000, while a woman would need $131,000. Both of those figures are also down from last year, when they were $122,000 and $139,000, respectively.
EBRI attributes a handful of factors to the fall in savings needed to manage health care costs in retirement. For instance, the research group derives its findings from the Congressional Budget Office and Centers for Medicare & Medicaid Services’ predictions for premium and health care cost increases. Since both the CBO and CMS have slowed their projections for the pace at which those costs will rise, EBRI has had to make similar adjustments as well.
This also means that the projected rate of growth for Medicare Part B, which covers medical insurance, and Medigap premiums has also slowed, according to EBRI. Further, projected growth rates for Medicare Part D premiums — which cover prescription drugs — and deductibles are down.
But don’t rejoice just yet. Mr. Fronstin warned that while the Affordable Care Act helped reduce the size of the so-called “donut hole,” the gap that limits what Medicare Part D will cover for drugs, it still exists. The amount of money retirees will have to shell out will likely rise in the long-run. Between 2010 and 2020, the donut hole is expected to shrink from 100% to 25%, due to the ACA, Mr. Fronstin noted.
“Individuals may pay a greater share of their overall costs because of the combination of the financial condition of the Medicare program and cutbacks to employment-based retiree health programs,” Mr. Fronstin noted in the report.
Furthermore, EBRI’s data doesn’t account for the additional cost of long-term care and the extra expenses early retirees face when they leave the workplace prior to Medicare eligibility.