Predict-Able

By Nevin Adams, EBRI

Retirement planning is a complex and highly individualized process, but many people find it easier to start by focusing on a single, specific target number.

For those interested in a single number for health care expenses in retirement, a recent EBRI report provides that.  Among other things, the report noted that a 65-year-old man would need $70,000 in savings and a woman would need $93,000 in 2012 if each had a goal of having a 50 percent chance of having enough money saved to cover their projected health care expenses in retirement.  A 65-year-old couple, both with median drug expenses, would need $163,000 in 2012 to have a 50 percent chance of having enough money to cover health care expenses.1

Determining how much money is needed to cover health care expenses in retirement is complicated.  It depends on retirement age, the length of life after retirement, the availability and source of health insurance coverage after retirement to supplement Medicare, the rate at which health care costs increase, interest rates, market returns, and health status, among other things.  That said, it is possible to project health care expenses with some accuracy, and EBRI’s recent analysis uses a Monte Carlo simulation model to estimate the amount of savings needed to cover health insurance premiums and out-of-pocket health care expenses in retirement.

However, those recent “single number” projections specifically excluded the financial impact of long-term care.

EBRI has long acknowledged the critical impact that health care expenses can have on retirement finances, and considering that EBRI has long incorporated both the costs of health care and long-term care in its Retirement Savings Projection Model® (RSPM), one might well wonder why this particular report specifically excluded those long-term care projections.

For all the complexity in those calculations, the reality is that everyone won’t have to deal with the expenses associated with long-term care.  For those who will, the impact on retirement finances could be significant, even catastrophic.2  That’s why EBRI has modeled their impact in the RSPM since 2003.

As noted above, for those interested in a single number, the recent EBRI report provides that, along with variations that permit one to take into account different likelihoods of success and gender/marital combinations.  We are able to do that because we treat longevity risk and investment risk stochastically,3 and the fact that those expenses (and the costs of insurance) are, at least relatively, predictable.

But while it is possible to come up with a single number that individuals can use to start setting retirement-savings goals, it is important to bear in mind that a single number based on averages will be wrong for the vast majority of the population—and that those who rely exclusively on that single number run the risk of running short.

Notes

1 Unlike reports produced by a number of organizations, the EBRI report also provided estimates for those interested in a better-than-50-percent chance of success.  See ”Savings Needed for Health Expenses for People Eligible for Medicare: Some Rare Good News,” online here.

2 The EBRI Notes article above illustrates the difference: If you ignore the impact of nursing home and home health care expenses, more than 90 percent of single male Gen Xers were projected to have no financial shortfall in retirement—but when that impact was included, just 68 percent of that group was projected to have no financial shortfall in retirement.  The error of ignoring nursing home and home health care costs is even more profound if one focuses on the percentage of individuals with shortfalls in excess of $100,000. 

3 For an expanded description of the difference stochastic modeling can make, see “Single Best Answer.”

See also:  “Employment-Based Retiree Health Benefits: Trends in Access and Coverage, 1997-2010”, and “Effects of Nursing Home Stays on Household Portfolios.”

“Grayed” Expectations?

By Nevin Adams, EBRI

Even the best retirement planning requires a fair number of assumptions: the age at which you hope to retire, for one thing; the amount of income that living in retirement will require; the length of time over which your retirement will last; the rate of return on your savings prior to, and following, retirement; the sources of retirement income that will be available to you, and in what amount(s).

Consider that in the 2012 Retirement Confidence Survey while worker confidence in having enough money to pay basic expenses in retirement wasn’t exactly high (only 26 percent were very confident), workers were noticeably less likely to feel very confident about their ability to pay for medical expenses after retirement (13 percent) and even less likely to feel very confident about paying for post-retirement long-term care expenses (9 percent) — levels that have remained statistically unchanged since 2010.

Indeed, the lack of employment-based retiree health insurance may result in unanticipated expenses in retirement. In the 2011 RCS, one-third of workers reported that they expected to receive this type of insurance from an employer (36 percent), though only 27 percent of retirees in that survey actually received it.

Earlier research found little impact of reductions in coverage on retirees, but the report notes that that may be because initial changes employers made to retiree health benefits affected future retirees, rather than those retired at the point of change.  A recent EBRI Issue Brief highlights that, over time, more and more retirees have “aged into” those program changes, resulting in the greater impact found in more recent studies.  The report also notes that most employers that continue to offer retiree health benefits have made changes in the benefit package they offer, changes that impact both the cost and availability of the benefit, including raising premiums that retirees are required to pay, eliminating employer subsidies, tightening eligibility, limiting or reducing benefits, or some combination of these.

However, as that Issue Brief also notes, very few private-sector employers currently offer retiree health benefits, and the number offering them has been declining, even in the public sector:  Between 1997 and 2010, the percentage of non-working retirees over age 65 with retiree health benefits fell from 20 percent to 16 percent.  Still, expectations seem to outpace reality; in 2010, 32 percent of workers expected retiree health benefits, while only 25 percent of early retirees and 16 percent of Medicare-eligible retirees actually had them.

Circumstances change, expectations matter, and retirement planning that relies on flawed or outdated expectations can, unfortunately, leave us short of where we need to be.

Notes

See Employment-Based Retiree Health Benefits: Trends in Access and Coverage, 1997‒2010

Workers Aging Into Retiree Health Changes

A growing number of workers are realizing they will not get retiree health care from their employer after they stop working, according to a new report by EBRI.

While earlier research found little impact from reductions in coverage on current retirees, EBRI finds that initial changes employers made to retiree health benefits affected future retirees as opposed to then-current retirees. Over time, more and more retirees have “aged into” those program changes, resulting in the greater impact found in more recent studies.

Paul Fronstin, head of health benefits research at EBRI, and co-author of the report, noted that for many years, despite the downward trend in retiree health coverage, many workers still thought they would receive the benefit.

“The data show that workers are still more likely to expect retiree health benefits than retirees are actually likely to have those benefits, but the expectations gap is closing,” Fronstin said. “By 2010, 32 percent of workers expected retiree health benefits, while only 25 percent of early retirees and 16 percent of Medicare-eligible retirees had them.”

The EBRI report, providing current data on trends in retiree health coverage, finds that while many employers no longer offer retiree health benefits, most that have continued to do so have made changes in the benefit package they offer: raising premiums that retirees are required to pay, tightening eligibility, limiting or reducing benefits, or some combination of these.

The full report, “Employment-Based Retiree Health Benefits: Trends in Access and Coverage, 1997‒2010,” is published in the October EBRI Issue Brief, online at www.ebri.org   The press release is online here. The full report is online here.

EBRI Update: Savings Needed for Health Care in Retirement

The December 2010 EBRI Issue Brief updates original EBRI research on the savings needed for Medicare-eligible persons to pay for health care expenses in retirement.

Even though the new health reform law will reduce some health costs in retirement for many people, retirees will still need a significant amount of savings to cover their out-of-pocket health expenses when they retire, according to the new EBRI analysis. Women, in particular, will need more savings than men because they tend to live longer.

For instance, EBRI finds that men retiring in this year (2010) at age 65 will need anywhere from $65,000–$109,000 in savings to cover health insurance premiums and out-of-pocket expenses in retirement if they want a 50–50 chance of being able to have enough money; to improve the odds to 90 percent, they’ll need between $124,000–$211,000.

Women retiring this year at 65 will need even more: between $88,000–$146,000 in savings if they are comfortable with a 50 percent chance of having enough money, and $143,000–$242,000 if they want a 90 percent chance.

These estimates are for Medicare beneficiaries age 65 and older: Anyone retiring early, before age 65, would need even more.

The press release is online here.  The full report is online here.

Some media coverage of the report:

* Today Show/MSNBC
* U.S. News
* Reuters
* The Hill
* Los Angeles Times
* Plan Sponsor