As companies continue to look for ways to reduce their health-care costs, they are pulling back on their retiree medical plan offerings and expecting former employees to contribute more to their coverage.
This double whammy means retirees are stepping into a big black hole of health-care costs, a six-figure proposition, according to experts, and seniors’ largest expense in retirement.
What’s adding to retirees’ possible financial woes is they are not actively having discussions with their advisors or other experts on how to handle growing health costs. And according to a recent Nationwide Financial survey, only about 38% of high net-worth (assets of $250,000 or more) people 55 and older are seeking advice about health expenses in retirement.
What retirees and pre-retirees don’t know may actually hurt them, and nearly half of the people interviewed in the Nationwide survey are “terrified” of what health care costs may do to their retirement plans.
Boomers are drastically underestimating their out-of-pocket health costs, according to the survey, pegging them at about $5,600 per year when, in reality, the number is about double that, according to the annual Fidelity Investments survey of retiree health care costs.
Most startling, says John Carter, president of Nationwide Financial Distributors Inc. is how respondents arrived at that estimate: three out of four people say “they guessed.”
Retirees rely too heavily on Medicare, but here’s the problem: Medicare does not pay for long-term care, which tends to consume a large part of nest eggs. What’s worse, Carter says many boomers are in denial about needing long-term care and don’t save adequately. People don’t recognize that 30% to 40% of 65 year-olds may live 20 years longer and will need nursing home care. Ancillary costs like hearing aids or eye care which can add up are also not necessarily covered by Medicare.
No End in Sight
According to the latest retiree health care cost estimate calculated by Fidelity, a 65-year old couple retiring in 2012 is estimated to need $240,000 to cover medical expenses throughout retirement. This represents a 4% increase from last year when the estimate was $230,000.
As troubling, the cost of health care is expected to continue rising significantly in the years ahead as medical inflation is outpacing cost of living adjustments for many people. Fidelity compared Social Security’s annual 2.3% cost of living adjustment against an assumed 6% average annual increase of health care costs for retirees nationally.
The wallets of pre-Medicare eligible retirees who want to retire early are particularly hard-hit, says Bruce A. Richards, chief actuary and principal at Mercer. Without the cushion of the guaranteed issue status of Medicare, coverage is about $10,000 to $15,000 per person, causing many workers to scuttle their plans to retire early, say at 55 or 60.
Coverage through subsidy dollars
Experts claim new strategies by employers to help employees cover medical costs could make them take a more active role in planning.
Increasing numbers of employers are converting to a defined contribution model that allows retirees to buy coverage through subsidy dollars, purchasing coverage that best meets their medical and budget needs. Roth 401(k)’s and an account-based vehicles like Health Savings Accounts or High Deductible Health Plans are instrumental in these approaches.
Employers contract with private exchanges which work much like the state exchanges mandated by health reform but minus the subsidies for residents who meet poverty level requirements. These private exchanges enable employers to control and manage what now become their own predictable retiree health care costs.
Exchanges also enable retirees to comparison shop, says Bryce Williams, president and CEO of ExtendHealth, which “ all in one place” gives Medicare-eligible retirees a view of Medicare Advantage, Medigap and Medicare Part D, and early retirees individual plans, as well as access to networks and hospitals throughout the country.
While outcomes vary depending on the employer subsidy, a retiree can typically do better with an individual plan purchased through the exchange than with a Medicare plan purchased on his or her own. For example, the average couple with a retiree subsidy from Ford could save $500 in out-of-pocket expenses annually.
What’s more, a group premium through an employer’s retirement plan can often cost more than purchasing an individual plan through an exchange with an employer subsidy, Williams says.
This “apples-to-apples” comparative approach drives more pricing transparency, allowing real price competition in the health marketplace, says Nicole Duritz, vice president for health and family at AARP which provides retirees with a wealth of health coverage information online and in print.
The power of the purse enabled through exchanges positions retirees to be smarter, more savvy and empowered shoppers.
Understanding policy terms and conditions relative to your medical situation is not necessarily easy. And for people soon to retire, the learning curve is short, says Richards.
Also, issues like whether you’ll be travelling in retirement, living between two homes or solely in your main residence will factor into your decision-making, says Duritz. Knowledge enables more informed choices and prevents after-the-fact surprises.