TAKE CARE

The thing that will wreck many Americans’ retirement

Universal health care promises to relieve Americans from the daunting medical costs that can drag them into poverty. Thankfully, older Americans—who have the biggest health expenses—already benefit via Medicare. But what many people may not realize, until it’s too late, is that Medicare doesn’t pay for everything.

A majority of Americans have no idea what their future medical expenses will cost (pdf), nor do they much consider how to pay for them by taking out extra insurance, paying out of pocket, or educating themselves about what Medicare will cover. Of course, it’s hard to know how long you’ll live or what illnesses you might face in old age. Insurance is supposed to address this uncertainty, but only if it is comprehensive.

A study from the Employer Benefits Research Institute (EBRI) found that Medicare typically only covers 60% of the average retiree’s health expenses. About 13% of healthcare expenses are paid out-of-pocket:

The expenses that aren’t covered by Medicare or insurance policies include Medicare premiums, co-pays, supplemental health care premiums, extended hospital stays, and other costs that vary tremendously depending on when and how you die. The average person who retires at 65 and dies at 90 will need $68,000 if they are a man and $89,000 if they are a woman to cover these costs, according to the EBRI.

(Greater costs fall on women because they tend to live longer. Old-age poverty is high among widows because many couples burn through their wealth when one partner—often the husband—gets ill and dies. The widow is then left behind with fewer assets and reduced Social Security, because she can no longer claim a couple’s benefit.)

But the EBRI says that there’s a 50% chance that even these large amounts won’t be enough. If a couple wants to ensure that they can pay for all their health care needs, they’ll need to set aside around $250,000. And that excludes the cost of long-term care in a nursing home, which can run to tens of thousands of dollars and is not covered by Medicare.

Most households don’t save that much. According the Federal Reserve’s most recent survey of consumer finances, the median financial assets of households led by 65- to 69-year-olds in America was just $64,000. Including less liquid assets, like housing, the average median net worth rises to around $260,000—enough to cover expenses, just, assuming houses can be sold easily and not much is spent on anything else. Social Security benefits are worth another $300,000, but this isn’t available to pay for large, unexpected health expenses.

Taking out additional health insurance can reduce the bill. Many Americans used to get supplemental health insurance from their former employers, but hardly any do now unless they worked for the government. Another alternative is Medigap insurance, which pays for part of long hospital stays and some expenses that would otherwise come out of pocket. The Affordable Care Act, otherwise known as Obamacare, expands coverage somewhat, mainly to do with prescription drugs, but substantial costs still fall on individuals.

In short, as Baby Boomers enter retirement living longer and suffering from more expensive diseases than ever, many will discover that they don’t have the money to pay for their care. Saving more and taking out extra insurance can help avoid this fate, but even then the amount it takes to cover for all post-retirement eventualities is beyond many people’s capabilities.

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