Rx Costs Drive Up Amount Needed for Retirement

Projected savings targets needed to cover health care in retirement are going up again after several years of decline, according to research by the Employee Benefit Research Institute (EBRI).

EBRI found that the range of retiree health savings targets rose between 6% and 21% between 2014 and 2015. While there are various factors at play, “the main reason for the increase in needed savings is related to the yearly adjustment for out-of-pocket spending for prescription drug use,” says Paul Fronstin, director of EBRI’s Health Research and Education Program and co-author of the report.

Since the EBRI analysis does not factor in the savings needed to cover such things as long-term care expenses, retiring earlier than becoming eligible for Medicare, and higher Medicare premiums related to higher income, “many individuals will need more than the amounts cited in this report,” Fronstin adds. Conversely, some workers will need to save less than what is reported if they choose to work past age 65, thereby postponing enrollment in Medicare if they receive health benefits as active workers.

NEXT: How much savings is needed?

The range of increases in the amount individuals need to save for retirement depends on how much health expenses a person is likely to have and how high a probability they want to have enough money on hand. Specifically, EBRI found, in 2015, a 65-year-old man would need $68,000 in savings and a 65-year-old woman would need $89,000 if each has a goal of having a 50% chance of having enough money saved to cover health care expenses in retirement. If either instead wanted a 90% chance of having enough savings, $124,000 is needed for a man and $140,000 is needed for a woman. 

Those with high prescription drug costs would need to save substantially more. For a married couple both with drug expenses at the 90th percentile throughout retirement who want a 90% chance of having enough money saved for health care expenses in retirement by age 65, targeted savings increased from $326,000 in 2014 to $392,000 in 2015.

EBRI points out that projections of savings needed to cover out-of-pocket expenses for prescription drugs are highly dependent on the assumptions used for drug utilization, which is why its analysis provides three sets of estimates: prescription drug use is at the median (mid-point, half above and half below) throughout retirement; prescription drug use at the 75th percentile throughout retirement; and in prescription drug use is at the 90th percentile throughout retirement. 

The full report, “Amount of Savings Needed for Health Expenses for People Eligible for Medicare: Unlike the Last Few Years, the News Is Not Good,” is published in the October 2015 EBRI Notes, online at www.ebri.org.