To minimize the shock of staggering health care costs in retirement, employers can help their participants determine these costs now and plan for the future.
A Willis Towers Watson research paper outlines how to address ballooning health care costs throughout retirement, more notably by implementing health savings accounts (HSAs), decision-support tools and education. According to Willis Towers Watson’s “Financing Health Care in Retirement” study, these costs can range from $140,000 to $190,000 over a retiree’s lifetime.
“Decision-support tools can help employees understand what the cost will be for these things,” says David Speier, managing director of benefits accounts at Willis Towers Watson. “Employers must help people understand those costs in basic ways through decision-support tools and education.”
Because many participants assume Medicare insurance will cover all their costs in retirement, most do not plan for future out-of-pocket charges, Speier says. “They think Medicare will cover their health care costs in retirement, but there are a lot of costs you have to pay for out of pocket, including premiums,” he explains.
Aside from hidden charges, retirees must also consider other factors driving up costs, including longevity and early retirement. As employees live longer, many fail to consider how that will increase their costs in the future, especially when combined with their health status.
“Those who are 65 years old are expected to live longer, with many living well into their 80s and some into their 90s,” Speier notes. “The other driver is your health status. If you’re really healthy, that will have a cost value. If you have a chronic illness, that will probably increase your costs and decrease your life expectancy.”
Most people rarely consider their own long-term care in the future, says Paul Fronstin, director, health research and education program at the Employee Benefit Research Institute (EBRI), but they must consider the possible costs if they do end up needing long-term treatment, whether at home or in an assisted living facility.
“How are you going to pay for that if you don’t have long-term insurance and have to go into a nursing home for several years?” Fronstin asks.
Offering an HSA at an earlier age can help participants reach adequate savings by the time they hit retirement. The Willis Towers Watson study used a 55-year-old man in average health throughout his life with a current HSA balance of $15,000 as an example. This individual would not have enough assets accumulated in his HSA to meet his retirement goals.
However, a 40-year-old man who is just starting to save should accumulate sufficient savings in an HSA to cover the cost of health care in retirement under most options. This individual would also still have enough to pay for some current-year out-of-pocket costs not covered by his health plan or an unexpected medical expense, the report says.
Fronstin adds that employers should not rely solely on HSAs to help employees afford future medical costs. Because HSAs have limits on how much employees can add, it restricts the amount of future savings. Currently, the shared limit is $3,600 for those with individual coverage and $7,200 for participants with family coverage.
“The message there is that even if you max out your HSA and invest the money and never touch it until you’re ready to retire, you can’t assume there will be enough money in there for your health care expenses,” he says.
Although it’s rare to see today, employers can consider offering a retiree medical plan, Fronstin says. These plans will typically help pay for cost-sharing rates and benefits not covered by Medicare, including copayments, coinsurance and prescription drugs.
Providing education materials on rising health care costs (both those that employees are facing now and those they’ll face in the future) increases awareness among participants. Willis Towers Watson says education is so important that it should be the first addition in any financial wellness program, not just for health care savings or HSAs.
“It’s really easy to say [education is needed], and people understand it, but there are a lot of challenges in everyone’s lives to find that right balance, whether it’s saving for retirement, health care and everything else in life,” Fronstin says.
Even if participants forego buying health insurance, the information they can receive from continuous education could warn them about impending costs.
“The odds are that you will need health care in retirement, and even if you don’t, you’re going to have to pay those premiums,” Fronstin concludes. “Get people into the habit of saving for retirement, with the realization that health care is going to be a big portion of their expenses.”
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