It’s hard enough getting
employees to save for their retirement. It’s even harder to get them to think
about how much they need to save for medical expenses in retirement.
“Most Americans don’t think about
what the medical component will be for them,” says Robert Grubka, president of
employee benefits at New York-based Voya Financial. “They often think that
Medicare and government-provided healthcare is enough and what people quickly
find out is, it is helpful but it doesn’t mean it’s enough.” When people think
about their retirement plan, the medical piece is “one of the most surprising
aspects of it,” he says.
But talking about managing
healthcare costs during post-work years is now a vital element of retirement
planning. And it’s one employers need to consider, especially as new statistics
shed light on the seriousness of the issue.
As a person’s retirement savings
shrinks in retirement, their medical expenses continue to increase, according
to Voya Financial’s report “Playing the long game – Understanding how
healthcare costs can impact your retirement readiness.” Healthcare costs rose
6.5% in 2017, but inflation only went up 2.4%, Voya found.
“The rapid rise of healthcare
costs could have a large impact on quality of life in retirement,” according to
the report. Forty-two percent of pre- and post-retirees say that healthcare is
their biggest concern, especially since nearly half of retirees or their
spouses experience a serious or chronic health problem.
Meanwhile, Medicare data finds
that those in their 70s spend about $7,566 per person in healthcare costs
annually. That figure more than doubles to $16,145 by the time a person reaches
age 96. According to Voya, Medicare will only cover about 60% of all retirement
healthcare costs, which means people need to figure out a way to cover that
other 40%.
The Employee Benefit Research
Institute estimates that the average couple will need $259,000 to cover their
out-of-pocket medical expenses in retirement. That figure includes premiums and
costs related to all Medicare plans and the cost of supplemental insurance.
When asked how much they should stock away for medical expenses, 69% of baby
boomers and 66% of retirees thought they needed less than $100,000.
As the retirement industry has
shifted away from defined benefit pension plans to defined contribution plans,
employers have tried to compensate for some of the missing perks of having a
pension plan. That includes offering options like life insurance, disability
insurance, accident insurance, critical illness insurance or a hospital
confinement indemnity.
A 2014 report by the Council for
Disability Awareness found that more than 214,000 employers were offering
long-term disability insurance plans to their employees in 2013, a slight
increase from the previous year.
The other component that is
relatively new is the high-deductible health plan that usually comes with
a health savings account. The money saved in an HSA can be used for
medical expenses in retirement if a person doesn’t use up their balance every
year. Any extra funds are invested, just like they would be in a typical
retirement plan.
High-deductible health plans make
the plan participant more responsible for how those health care dollars are
spent. It also has “sped up the recognition of the healthcare issue,” Grubka
says.
According to the 2016 Employer
Health Benefits Survey by the Kaiser Family Foundation, 29% of covered workers
are enrolled in a high-deductible plan with a savings option. Over the past two
years, enrollment in these high-deductible plans increased 8 percentage points
as enrollment in PPOs dropped 10 percentage points, the report found.
Many times, individuals must pay
out most or all of their deductible at once, which could be $2,500 for an
individual or $5,000 for a family. That’s when people start taking loans from
their retirement plan to help cover costs.
That’s why some of these
ancillary products, like critical illness or disability insurance, are so
important.
“It is so people can get through
the chunky expenses and not get to the point where they have to tap their
savings or their retirement plan,” Grubka says.
It’s critical that employees try
and determine what all of their expenses will be in retirement. Individuals
must try and determine how long they will live, by looking at their family
history and making an educated guess. Then they should calculate their
projected monthly Social Security payment by setting up an account with the
Social Security Administration. They should then add up their expected monthly
living expenses like rent/mortgage, groceries and utilities and any healthcare
expenses that are not covered by Medicare to come up with a target number.
They should base how much they
set aside for retirement on that figure.
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