How to put retirement healthcare costs on employees’ radar
When people sit down to figure out how much they need to save for retirement, many times they don’t take healthcare expenses into account. That could be because they believe government programs will step in and cover all of their expenses or just that the idea hasn’t crossed their minds, says Adam Stavisky, senior vice president, Fidelity Benefits Consulting.
Fidelity takes a look at retirement healthcare expenses each year to determine how much the average 65-year-old couple will spend on healthcare expenses in retirement. The 2017 estimate of $275,000 is a 6% increase over last year’s estimate of $260,000.
That increase reflects general market trends and a variety of expenses individuals might face in retirement, including Medicare premiums, Medicare copayments and deductibles and prescription drug expenses. The $275,000 figure doesn’t include nursing home or long-term care expenses.
“With ongoing uncertainty across the healthcare landscape, it’s more important than ever for individuals to educate themselves on steps they can take to prepare for their healthcare needs in retirement,” Stavisky says. “These expenses are only expected to increase in the future, so it’s critical that people include healthcare as a significant part of their retirement plan.”
Stavisky points out that most people probably assume Medicare pays for everything in retirement, but “by design it doesn’t cover everything.”
About 35% of that $275,000 accounts for most individuals having to pay for Medicare Parts B and D. Part D is a supplement to Part B.
Employers can help by taking a more active role in helping employees manage their health and wellbeing during their pre-retiree years and providing benefits that can contribute to improved health and potentially lower healthcare costs in retirement.
Many companies have moved to high-deductible health plans that are paired with health savings accounts. HSAs help employees save money for their current healthcare expenses pre-tax, but if they don’t spend that money, they don’t lose it. It gets invested and can be used for future healthcare expenses as well. HSAs are like having an additional tax-advantaged retirement savings account, only the money comes out tax-free as well as long as it is used for medical expenses.
HSAs have become an integral benefit in the industry. The number of clients on Fidelity’s HSA platform increased 38% last year and the number of individual Fidelity HSA holders increased 46%, according to Fidelity.
Guaranteeing a secure and stress-free exit
Why should employers care whether their employees have enough money saved up for retirement? “Because my big insight is that if people can’t afford to retire, then they won’t,” says Stavisky. “There is an impact to companies and their workforce dynamics, their cost of doing business if they have a cohort of their population that can’t retire and doesn’t. They retire in place.”
Some individuals have critical skills and institutional knowledge that is important for companies to keep around but “most employers do want employees to exit in a timely fashion consistent with their business needs,” he adds.
When a company employs older workers, its healthcare costs tend to go up, which affects everybody’s healthcare expenses. For those companies where physical labor is required, they don’t want people of a certain age conducting serious physical labor, Stavisky says. There are workers compensation risks and other risks associated with employing older people.
Employers are starting to articulate to employees all the ways the company compensates them, including base pay, bonuses and overtime, healthcare and 401(k) plan. It is important that they emphasize that even though their workplace benefits package is great, employees are still on the hook for other expenses in retirement, like healthcare and additional savings.
That’s another reason employers have latched on to financial wellness programs.
“There’s a growing acknowledgment from plan sponsors that they need to meet them where they are financially. Some need help with budgeting and debt repayment, things that are not under the purview of plan sponsors,” says Stavisky.
There is a growing recognition that employers need to take a more comprehensive view of finances and employee wellbeing because all of these things are interconnected and impact an employee’s health and job performance.
And while the $275,000 retiree healthcare number is daunting, “absent some material event from Washington, this number will continue to rise,” Stavisky says.
Employees can address that with the power of compounding, by putting additional funds in their health savings accounts so they will be able to self-fund their own retiree medical if they have to, he adds.