The Disconnect: Few Prepare for Retiree Health Needs/Expenses

Top Retiree Priority?  Good Health.  Largest Retiree Expense?  Health Costs.  Yet, only a handful of plan sponsors offer access to retiree medical coverage and funding options. 

According to the 2017 Merrill Lynch study titled, Finances in Retirement: New Challenges, New Solutions, today’s retirees tell us that the number one ingredient for a happy retirement is health.  At the same time, the uncertain and potentially high cost of health care is their number one financial worry of retirement. According to the study, ”Forty-three percent erroneously believe that Medicare will cover nearly all their health care costs in retirement.  Few correctly anticipate the total potential cost.”  

According to EBRI, A married couple currently age 65 with average medical expenses would need to have saved $273,000 to be 90% certain that they can cover their out-of-pocket health-related expenses in retirement (without considering long term care expenses)!  That amount far exceeds the median household net worth of all Americans age 65 and older ($202,950 in 2013 according to the Census Bureau, of which approximately $145,000 was home equity).  

Few employers offer retiree health coverage. Fewer still provide any employer financial support. In the 54th annual PSCA survey, reflecting 2010 data, only 8.5% of employers confirmed that they offered access to a retiree health plan. Our just released 60th annual PSCA survey shows that percentage continues to decline – now only 4.8%.

The Merrill study also asserts, “The average cost of retirement is over $700,000 or about 2.5 times that of the average house. It’s truly the purchase of a lifetime. “ The study concludes, “Two of the most important investments Americans can make in retirement are to maintain good health and cover its uncertain costs.”

Today, plan sponsors can provide access to options workers can use to prepare: 

• A Health Savings Account-qualifying “high deductible” health plan, featuring:
  o Cafeteria plan, pre-tax contributions to a Health Savings Account (HSA) – such contributions may avoid federal and state income taxes as well as Social Security (FICA) and Medicare (FICA-Med) taxes;
  o Investments that grow tax deferred so long as they remain in the plan; and 
  o Assets that are tax free when received if used to reimburse qualifying medical expenses (most out-of-pocket expenses, Medicare premiums, employer-sponsored Medicare Supplement premiums, long term care expenses, etc.).   
• A retiree-pay-all public/private coverage exchange of Medicare Advantage and Medicare Supplement options. 

A plan sponsor can lower their costs while enabling worker preparation for post-employment medical expenses by offering an option that is accorded the largest employee benefit tax preference – larger than the tax preferences available in a retirement savings plan.  

So, you may want to (re)consider health coverage decisions and offer:

• A Health Savings Account-qualifying “high deductible” health plan, and 
• Retiree-pay-all, insured, Medicare Advantage and Medicare Supplement options.  

Today’s best practices designs often feature both a retirement savings plan AND a health savings account.