The Real Health Care Number That Is Needed In Retirement

EBRI (Employment Benefit Research Institute) and apparently Fidelity Investments are at it again on the subject of out of pocket health care costs that individuals will face in retirement.

EBRI; “SAVINGS TO SUPPLEMENT MEDICARE WITH MEDIGAP AND PART D: A man with median drug expenditures would need $65,000 in savings and a woman would need $93,000 if they want an average (50 percent) chance of having enough money to cover health care expenses in retirement. At the highest (90th percentile) level of drug spending, a man would need $187,000 and a woman $213,000 to have a 90 percent chance of having enough money to cover health care expenses in retirement." (See quote here)

Fidelity; “A 65-year-old couple retiring this year will need $230,000, on average, to cover medical expenses in retirement. The study is based on projections for a couple of 65-year-olds retiring this year with Medicare coverage. The figures include the federal program’s premiums, co-payments and deductibles, as well as out-of-pocket prescription costs. The study assumes no employer-provided insurance in retirement, and a life expectancy of 85 for women and 82 for men." (See USA Today Article here)

Well, now let’s look at common sense.

If we do a little research on Medicare.gov we can find out the Medicare Part A is free but, it also comes with a $1,100.00 deductible each year and every other Part to it also has a premium.

Medicare Part B; for those earning less than $85,000 or $170,000 per couple based on MAGI, the monthly premium for coverage is $115.40 or $1384.80 per year.

Medicare Part C / MediGap Plan; on average has a $180.00 per month premium for Plan F (This pays for any co-pays, deductibles and excess charges on Part A & B). Please note that this premium will increase as the beneficiary ages  and a 81 year old can expect to be paying at least $259.67 per month.

Medicare Part D is a little trickier because the costs can range anywhere from $10.00 a month to upwards to $150.00 a month depending on the types of medications that are needed.

Wikipedia reports that the average premium in 2010 was roughly $40.00 and that “in 2010, the standard benefit requires payment of a $310 deductible, then 25% coinsurance drug costs up to an initial coverage limit of $2,830”.

For these calculations Humana’s Enhanced (PDP) plan was selected. This gives access to any hospital & doctor but, does come with coinsurance: $7 - $72 or 31%. The Plan expects that the enrolled will have roughly $1818.00 in annual drug costs, but this is also going with NO particular drugs entered to be covered. (See Plan details here)

When the Medicare Parts are all added up, (Part A is $0, Part B is $1384.80, Part C is $2160.00 and Part D is $1818.00) the total is $5,362.80 per person.

If we then use the Longevity provided by Fidelity (82 for men; 85 for women), a simple inflation rate of 3%, and the data from Medicare.gov ($5,362.80), we can calculate the compounded value of total payments for the next 17 & 20 years.

The result; men can expect to pay $129,068.03; women $158,109.27. Combined = $287,177.30.

This does not include coverage for Dental, Hearing, Vision, Long Term Care & Podiatry.

Once again; EBRI projected a 90% success rate for a male to be $187,000; a female $213,000 and Fidelity gave us their total Health Care Bill of $230,000.

By just using simple math, the basic inflation rate & information from Medicare.gov the expected costs for a male is $129,068; for a female the total is $158,109 with a total of $287,177

But what happens if we use an inflation rate of 5%, which happens to be the lowest inflation rate that is provided by Fidelity on their own Health Care Cost Calculator (which can be found here)?

The total for a male is $157,797; for a female the total is $200,421; Combined = $358,218

What happens if we use the inflation rate 6.9% which was provided by Bloomberg back in 2009?

Male - $191,898; Female - $252,837; Combined = $444,735

Finally, what would the numbers look like if we actually used the life expectancy that Fidelity provides on their own Health Care Calculator for the average female & male who are currently 65 at a rate of basic inflation (3%)?

The female’s life expectancy is 94 and her health care costs are expected to total - $262,412.

A male’s life expectancy is 92 and his health care costs are expected to total - $236,779.

So if we use basic information we can conclude that the overall costs for a 65 year old couple who will have life expectancies of 92 (m) & 94 (f) will be about $499,191.

Again, what did Fidelity state the average was going to be?

The answer $230,000, off by more than half, but we have already stated in earlier posts that Fidelity must think people get healthier as they age.

EBRI’s best calculation for a 90% success rate?

$400,000, off by close to $100,000, but again, they are stating a 90% success rate; there is room for error.

To reiterate, if we just took basic information that is provided from Medicare.gov, with life expectancies from Actuarial Tables provided by Fidelity and applied an inflation rate of just 3.0% the total is $499,191.

By the way, HealthView Services’ RetireMark Software calculates the total costs to be $579,740.00 for an average 65 year old couple living to ages 92/94.

But what do you expect from a company whose mission is to bring the correct Health Care Expenses to the general public so they can better plan for their financial future?