Retirement’s Gray Area: Health Care Costs

By Patty Kujawa

Aug. 28, 2018

About 64 percent of workers say they think they will be able to retire comfortably, but when asked specific questions about being able to pay for health care and other long-term security issues, it’s hard to understand where the confidence comes from.

The Employee Benefit Research Institute’s “28th Annual Retirement Confidence Survey” measured worker and retiree confidence about retirement issues. Overall, a third of the 2,042 respondents felt confident in their ability to live well in retirement. While that statistic was virtually unchanged from last year, very few workers or retirees have figured out one of retirement’s largest expenses: health care.

According to the report, only 1 in 5 workers and 4 in 10 retirees have actually done the math. Fidelity’s latest evaluation shows that retirees will need an average of $280,000 in 2018 dollars to cover health care when they retire.

“Health care costs continue to rise and continue to be a major expense for retirees,” said Lisa Greenwald, executive vice president of Greenwald & Associates, and co-author of the report. “Despite the importance and significant impact health and health care costs can have on retirement security, it seems to be a blind spot in retirement planning. This is a gap that needs to be addressed,” Greenwald said.

People realize they don’t know what they will need to pay for health care costs, and more than 7 in 10 workers surveyed said they thought it would be helpful for their company to offer this type of planning help. In particular, 76 percent of defined contribution participants said they would like this help, compared to 63 percent of nonparticipants.

Workers also showed interest in products they think might provide security, but may wind up not being the best investments, said John Lowell, partner and actuary at October Three Consulting.

health care costs
A 65-year-old single woman with $500,000 in 401(k) savings could expect to get about $2,500 per month when retiring this year. And that isn’t a lot of money, especially considering health care costs in retirement.

The survey showed that 4 out of 5 active defined contribution participants said they were interested in putting some or all of their money into guaranteed lifetime income products. Guaranteed lifetime income products are investments that are offered either inside defined contribution plans as an investment option or outside the plan in the retail market. It provides a steady, monthly income for life.

Nearly a quarter of active defined contribution participants said they would buy a product that would give them a steady monthly check for life.

While the interest in lifetime income among active workers seems high, only 7 percent of retirees reported purchasing that kind of product with their defined contribution savings.

Lowell said many soon-to-be retirees get a huge wakeup when they start realizing how little their savings translates into a monthly income stream for life.

According to Schwab’s Annuity Estimator, a 65-year-old single woman with $500,000 in 401(k) savings could expect to get about $2,500 per month when retiring this year.

“They think they have a lot of money” in their retirement accounts, Lowell said. “When it is converted to an annuity and they see that outcome, there is a look of horror. It doesn’t feel like a ton of money anymore.”

Patty Kujawa is a freelance writer based in Milwaukee.


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