Health Care Expense Tools Struggle to Capture a Complex Reality

New research from Empower Institute suggests specific health conditions create disparate retirement savings needs for people at the same age and wealth level, necessitating more thoughtful predictions of the cost of care in retirement. The report, “An Apple a Day: The Impact of Health Conditions on the Required Savings for Healthcare,” denotes some important ways health costs and related mortality projections can have counter-intuitive effects on retirement planning, especially when comparing the projected lifetime health care expenses of retirees with/without these chronic conditions.

As the report explains, for the average American, the primary health care-related expenses in retirement are going to come in the form of premiums for Medicare parts B and D, along with any supplemental insurance purchased on exchanges or in the private markets. Out-of-pocket expenses will also be significant for most people, according to Empower, coming in the form of “copays and cost sharing related to medical treatments and medications.”

Most of today’s (trusted) health care cost prediction tools can factor in these basic elements, but Empower’s report warns these more-predictable costs are just one part of the picture. The report shows that, while the general terms of this expense formula hold across individuals, any given retirement saver could face a substantially different expense arc. One of the most counterintuitive aspects of the expense projection effort is that, depending on how the individual’s treatment for one or more of the aforementioned chronic diseases goes, getting that disease can actually decrease one’s anticipated lifetime health care expenditure. Sadly, this is because it’s cheaper in general to die sicker, younger than it is to live healthily into one’s late 80s, 90s or beyond. 

Empower shows that for a healthy 65-year-old male retiree, cumulative savings of approximately $144,000 would be required to fund general health care expenses for a projected retirement period of approximately 20 years at a 90% confidence level. For women, the amount is $156,000.

“Simply factoring in the additional expenses associated with one (or more) of the aforementioned diseases dramatically impacts the expense picture,” the report continues. “However, in many cases the higher retiree health care costs of conditions such as diabetes and tobacco use are actually offset by reduced life expectancy. The net effect is that, in certain health states, less savings are required for health care.”

NEXT: More counterintuitive numbers

Empower finds medical conditions such as cancer, diabetes, cardiovascular disease and high cholesterol require markedly different medical costs per year under Medicare, so any advanced prediction tools should be able to account for this. Usually the result will be that individuals getting these diseases will spend less on health care in retirement—though the annual rate of expenses will be much greater.

“Ironically, individuals in excellent health may face the highest overall medical expenses because they are projected to live the longest,” Empower says. “For example, the savings required for a 65-year-old female to confidently fund health care expenses range from a low of $111,000 (Type 2 diabetes) to a high of $156,000 (in good health)—even though having diabetes will cause higher annual costs.”

As people live longer and medical technology advances, such questions about what is included in retirement health care cost projections will only become more pressing and more difficult, Empower says. The paper even predicts such seemingly trivial factors as blood pressure and cholesterol levels during the approach to retirement age could become informative predictors of how much an individual may need to save for health care—or not.

“The study shows that high blood pressure is highly prevalent among pre-retiree households. However, high blood pressure is very treatable through medication and dietary changes. As such, it has a negligible effect on life expectancy,” Empower explains. The study found that the life expectancy for someone with high blood pressure is only one year less than that of healthy individual, so long as the condition is treated effectively.

“The same cannot be said for all health conditions,” Empower warns. “Diabetes, cancer and tobacco use present a much greater variance in the probability of survival and life expectancy numbers are shown to drop more significantly compared to a healthy individual, according to the study.”

NEXT: What it all means moving forward 

Of course, the work of improving retirement health care cost predictions won’t be easy. Getting people to think about their future health and mortality is even more difficult than getting them to think about their future finances.  

“This is an effort to bring greater clarity to a largely ignored aspect of retirement planning,” explains W. Van Harlow, director of research for the Empower Institute. “There’s no question that there is a significant population of households who could benefit from incorporating health state into their view of retirement medical costs.” Harlow further observes that data from an earlier study, the Lifetime Income Score V, “shows that only one of five households is expected to be healthy as they enter retirement.”

The study explains the Empower Institute’s proprietary formula for health cost predictions, which combines elements of health-specific mortality risk with investment return uncertainty to help determine the amount of savings required to fund future healthcare expenses. “The study indicates that required health care savings differ significantly when putting factors like actuarial tables and Medicare expenses into the overall equation,” Harlow notes.

He concludes that, while the study highlights the need to make health care a core component of retirement planning, it also offers participants and advisers an opportunity to “cut through some of the murkiness in decision-making. With more information and greater clarity, participants should have greater confidence in the decisions they make about investing, financial planning and ultimately retiring.”

The research results are reported here.