Drug Costs A Key Factor In Retiree Health Care Cost Inflation

In the latest annual update of its retiree health savings analysis, EBRI found that the range of retiree health savings targets rose between 0% and 6% between 2015 and 2016.

A new analysis out from the Employee Benefit Research Institute (EBRI) suggests projected savings targets needed to cover health care in retirement went up last year, after several years of decline.

Health care cost projections for retirees indicate major challenges ahead, EBRI explains, but they are actually generally lower than they were five years ago.

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“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,” observes Paul Fronstin, director of EBRI’s Health Research and Education Program and co-author of the annual health savings analysis. “Because actual out-of-pocket spending for prescription drugs in the most recent data turned out to be higher, future estimates have gone up.”

EBRI warns that its analysis does not factor in the savings needed to cover such things as long-term care expenses, retirement earlier than becoming eligible for Medicare, and higher Medicare premiums related to higher income. Thus, “many individuals will need more than the amounts cited in this report,” Fronstin suggests.

“Some workers will actually 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,” he adds. “The range of increases 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 2016, a 65-year-old man would need $72,000 in savings and a 65 year-old woman would need $93,000 if each had a goal of having a 50% chance of having enough savings to cover health care expenses in retirement.”

NEXT: More from the EBRI analysis 

EBRI finds that to have a 90% chance of having enough savings, the man would need $127,000 and the woman would need $143,000.

“Not surprisingly, those with high prescription drug costs would need to save substantially more,” Fronstin says. “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 would be $349,000 in 2016.”

As Fronstin explains, the EBRI analysis updates previous estimates on savings needed to cover health insurance premiums and health care expenses in retirement: “As before, it 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 the analysis provides [a range of estimates].”

Fronstin further observes that “Medicare was never designed to cover health care expenses in full … In 2013, Medicare covered 62% of the cost of health care services for Medicare beneficiaries ages 65 and older, while out-of-pocket spending accounted for 13%, and private insurance covered 13%.”

The full report, “Savings Medicare Beneficiaries Need for Health Expenses: Some Couples Could Need as Much as $350,000,” is published in the Feb. 1, 2017 EBRI Notes, online at www.ebri.org

Families Need Further Discussion on End of Life Finances

Helping clients develop an estate plan may help them avoid certain tax consequences, Fidelity says.

According to findings from a recent Fidelity Investments Family & Finance Study, while the vast majority (90%) of parents and their adult children say it’s important to have frank conversations about estate plans and wills, all too often the discussions aren’t taking place—or at least, in a meaningful way.

While 70% of parents surveyed believe they’ve had detailed conversations with their children on the subject, more than one-half of their children claim this isn’t the case.

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Even in the simplest of family situations, conversations that do not occur frequently and in detail may result in fairly substantial family disagreements and disconnects. For example, the Fidelity study found that seven in 10 parents and their children had major misconceptions about the value of the parent’s estate—and on average, children underestimated that value by $278,000.

In addition, while eight in 10 parents believe their children know where to find important documents such as wills, power of attorney and health care proxies, only two-in-three children actually report possessing this knowledge.

The potential for confusion only becomes greater—and the need to start planning even more urgent—when one considers that the modern-day concept of family may include stepchildren, in-laws and former spouses. Furthermore, an estate plan provides protection for those left behind, which may be especially important for loved ones requiring special care. Without a will, the state laws where a person resides may determine how the property is distributed upon one’s death, and this outcome may not be aligned with what was intended nor be appropriate for a specific situation.

NEXT: What an estate plan can do for clients

Regardless of one’s net worth, passing on assets to the next generation may involve a multitude of complex issues. Having an estate plan in place may help simplify the entire process, by allowing a person to accomplish a number of things, including the ability to:  

  • Preserve and maintain control over the transfer of assets;
  • Designate who will execute wishes if a person is incapacitated or passes away;
  • Protect the family’s privacy and possibly avoid probate;
  • Provide immediate access to liquidity;
  • Allow for the payment of bills in the event of incapacitation or death; and
  • Choose who beneficiaries will be and how they will receive assets.

Fidelity adds that having a sound estate plan in place may help one avoid certain tax consequences. Without proper planning, an individual could end up unnecessarily paying certain Federal estate taxes, as well as, possibly, state estate and inheritance taxes. For retirement assets, a good estate plan may help an individual avoid accelerated withdrawals from an IRA—which would cause a spike to income taxes, as opposed to a required minimum distribution (RMD) over an heir’s life.

“The study also reveals that more than two-thirds of adult children and their parents disagree about the appropriate time to initiate conversations about the parents’ finances. When it comes to legacy planning, generally speaking, the sooner the better,” says Kevin Ruth, Head of Wealth Planning and Personal Trust at Fidelity Investments. “Failing to have an estate plan in place can lead to significant family confusion once a beloved family member passes. Too often, it may result in costly mistakes or the wishes of a loved one’s estate and legacy plans going unfulfilled.”

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