Don't Let Golden Years Be Tarnished (back)
Surveys highlight need for post-retirement health care education
Two recent surveys highlight the need for employees to be better educated about medical costs in retirement.
Fidelity Investments' annual Retiree Health Care Costs Estimate projects that a 65-year-old couple retiring this year will need $250,000 to pay for medical expenses throughout retirement, not including nursing home care.
Fidelity also surveyed 376 married individuals, 65 years or older and not working fulltime, to better understand their experiences in financing health care needs in retirement.
The survey reveals that almost half (47%) are paying more each month for insurance premiums and out-of-pocket health care costs than they had anticipated in retirement. Only three out of 10 of these retirees saved specifically for health care needs in retirement during their working years.
Educating employees about the need to save specifically for health care costs in retirement has been a difficult subject for employers to tackle, says Sunit Patel, senior vice president with Fidelity Investments.
"It's a complex issue. It's one where we've seen a split," he says. "Some employers are thinking it's better to educate and focus employees on these costs and the fact that their company might not provide a benefit; other companies shy away from it. I do think at the end of the day it's important for employers to understand that there is this gap out there and it could potentially impact retirement rates as their workforce ages."
Employers have generally not yet started talking seriously to their employees about health care costs in retirement, says Malcolm Cheung, vice president of long-term care with Prudential.
But as more 401(k) plans are put on autopilot, with auto-enrollment and auto-rebalancing features, he believes plan sponsors might find they have more time to talk to employees about potential health care costs in retirement.
"Employers will have more opportunities going forward to talk about post-retirement health care costs than they have in the past because people are more familiar, and better educated, with respect to actually saving for retirement and using a 401(k)," says Cheung.
The Fidelity study found that health care costs average $535 a month, or about one-fifth of an average couple's total monthly expenses of $2,842.
Among those surveyed, 11% said their health care costs are $1,000 a month or higher. Average health care costs ranked second to the largest expense, food, which averaged $659 a month, and slightly higher than housing-related costs, which averaged $494.
"Employees could benefit from a greater emphasis on health care costs in retirement," says Patel. "Health care costs are quite unique relative to other costs in that they are basically a fixed amount for everyone. They don't depend on my current income, or how much I've saved. For food or clothing I can choose to shop at a lower-cost mass-market retailer like Target, or I can shop at a higher-end retailer like Saks. I've got the ability to move my expenditures up or down in just about every category except for health care. It's a unique expense, so maybe needs to be looked at a little bit differently than the other ones."
When asked to identify their single biggest financial concern today, three out of 10 retirees said paying for today's health care costs and long-term health care expenses such as a nursing home are among their biggest worries.
Other financial concerns included paying for daily living expenses such as food, transportation and utilities (17%), helping grown children and grandchildren with their financial needs (10%) and paying for housing (7%). A little more than a third (35%) of retirees said they have no financial worries.
According to the study, 44% said health care expenses have had a negative effect on their retirement budget. Over half (51%) are paying out-of-pocket for health care costs not covered by Medicare, and 45% have purchased supplemental insurance to cover the gap.
Only a small percentage of retirees indicated using other measures, such as tapping retirement funds earlier than anticipated (2%), credit cards (2%) or relying on family (1%).
The 2010 retiree health care costs estimate is 4.2% higher than last year's estimate of $240,000 and 56% higher than in 2002, when Fidelity first calculated retiree health care costs at $160,000.
"I think it's fair to say the estimate tracks closely to medical inflation," says Patel. "The problem is medical inflation has been exceeding general inflation. And each year it does, that means individuals, either explicitly or implicitly, have to take money from another bucket - whether it's entertainment or going to eat out - because they need a bigger allocation for health care."
The survey assumes individuals do not have employer-provided retiree health care coverage, but do qualify for Medicare.
The estimate takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B. It also considers prescription drug coverage premiums associated with Medicare Part D and out-of-pocket costs, as well as certain services excluded by Medicare.
The Fidelity estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care.
Second survey similar
The Fidelity numbers echo results from a similar study by the Center for Retirement Research at Boston College, which conducted over 300,000 simulations and found that the average remaining uninsured lifetime health care expenditure for a typical married couple age 65 is $197,000.
This amount represents the present value of the couple's premiums for Medicare and private insurance, out-of-pocket payments and home health costs, not including nursing home care. When nursing home costs are included the amount for a typical couple jumps to $260,000, with a 5% risk of exceeding $570,000.
"Even at the peak of the stock market in 2007, less than 15% of households approaching retirement had accumulated that much in total financial assets, much less financial assets available for health care," says Alicia Munnell, director of the Center for Retirement Research.
The study, "What is the Distribution of Lifetime Health Care Costs From Age 65?", cites the main sources of retired households' health care cost risk as copayments for Medicare-covered payments and payments for noncovered services, such as nursing home care.
About one-third of individuals turning 65 in 2010 will need at least three months of nursing home care, 24% will need more than a year, and 9% will need more than five years.
In 2008, the annual cost of a nursing home was about $71,000 for a semiprivate room and $79,000 for a private room. Medicare, meanwhile, pays for a maximum of only 100 days of nursing home care.
"These post-retirement health care costs, especially long-term care and nursing home costs, can be very significant," says Cheung. "Many people probably don't take that specifically into account when they're trying to figure out how much income they need to live on in retirement. You need to take health care costs and long-term care costs into consideration when planning your income needs post-retirement."
The CCR study also found that although lifetime health care costs decline with age, they remain substantial. At age 85, couples face an average remaining lifetime cost of $140,000 without nursing care, and they face a 5% risk of exceeding $266,000. Including nursing home care, the average cost is $203,000, with a 5% chance of exceeding $477,000.
Source: Employee Benefit News