Health Costs Are Retirees’ Top Financial Worry

Longevity is redefining retirement planning

By Stephen Miller, CEBS Sep 18, 2014
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When educating employees on the need to contribute adequately to their 401(k)s or similar plans, HR benefit managers may want to note some new findings.

Health was cited as the most important ingredient to a happy retirement by 81 percent of U.S. retirees in a recent study, followed by financial security (58 percent), loving family and friends (36 percent), and having a sense of purpose (20 percent).

Based on a nationally representative survey of 3,300 respondents, the study report, Health and Retirement: Planning for the Great Unknown, discusses the implications of health and health care costs on quality of life in retirement. The research was conducted in 2014 by financial services firm Merrill Lynch in partnership with Age Wave, which studies issues related to an aging population. Among the key findings:

Regardless of wealth level, health care expenses rank as the most pressing financial concern in retirement (41 percent), exceeding even the fear of outliving one’s money (29 percent).

People age 50 and older were nearly twice as worried about the cost of retirement health care as they were about the actual quality of care they might receive.

The vast majority of people have not factored health care costs into their retirement planning, and 7 out of 10 couples age 50 and older have not discussed how much they may need to save to pay for health care during retirement.

More than half of retirees (55 percent) left the workforce earlier than they expected, and the number one reason for their early retirement was a health problem.

Communication Gaps

Fewer than one out of six pre-retirees age 50 and older has attempted to forecast how much they may need to cover health care or long-term care expenses in retirement. Many pre-retirees surveyed said the information available to them when trying to determine how much they might need—and how best to prepare for and insure against these costs—is overwhelming (54 percent), confusing (49 percent) or frustrating (36 percent).

Moreover, the vast majority simply don’t understand Medicare, with a mere 7 percent of people ages 55 to 64 citing a strong grasp of Medicare coverage options. Even among actual Medicare recipients, fewer than one out of five (19 percent) said they had ample knowledge about Medicare options. Between unpredictable and costly health care expenses and unexpected early retirement due to health problems, planning ahead can be confusing and overwhelming, according to the report.

“For many, health can be the difference between a retirement of opportunity and independence or one of worry and financial challenges," which is why both health and wealth should be factored into planning for later life, advised Andy Sieg, head of global wealth and retirement solutions for Bank of America Merrill Lynch, in a statement accompanying the report.

A Dissenting View
Is health care really the biggest expense that older Americans face in retirement? September 2014 research from the Employee Benefit Research Institute says no: It’s their home and home-related expenses—although health care is No. 2 and it captures a rising share in their expenses, and can be very high for some toward the end of life.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

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