The Mean-ing of Average

As if retirement savers didn’t have enough problems, last week Fidelity Investments reminded us how much money we’re going to need for health care.

According to Fidelity’s annual estimate, an average couple retiring in 2009 would need $240,000 set aside by age 65 in order to pay for health-care expenses in retirement (see “Retiree Health Care Estimate Jumps 6.7%”). Worse, that’s up from $225,000 in 2008—and even worse, the 2009 figure is 50% higher than the $160,000 Fidelity estimated in 2002 would be required.

Even those workers who still have employment-based retiree health benefits to supplement Medicare, but who must pay their own premiums, need to set aside a hefty amount, according to a 2008 EBRI report; men would need between $102,000 and $196,000 in current savings (50th and 90th percentiles, respectively), while women would need between $137,000 and $224,000, respectively, due to their greater longevity, according to the report (see “EBRI Pinpoints Retiree Health Expenses”.

That 2009 Fidelity estimate continues to assume individuals do not have employer-provided retiree health-care coverage, but it does take into account coverage by Medicare, while assuming life expectancies of 17 years for a male and 20 years for a female.

Now, those estimates are actuarially sound. EBRI notes that, on average, women age 65 live to age 85, while men will live to age 82. However, as Dallas Salisbury, EBRI’s CEO, has reminded me more than once, most of the population is not average. In fact, by the very definition of the term, “average” means that about one-half of men and women will die before they reach average life expectancy—and the rest will live longer.

EBRI research has shown that a couple retiring at age 65 in 2008 could need as “little” as $194,000 to cover health insurance costs and health-care expenses not covered by Medicare. However, if that couple happens to live far beyond average life expectancy, say to that experienced by the 90th percentile, and at the same time needs to use a lot of prescription drugs during retirement (again, the level out at the 90th percentile), EBRI notes that the couple could need as much as $635,000 in savings when entering retirement.

Indeed, setting aside the financial viability concerns surrounding the Medicare program (it’s actually in far more precarious financial shape than Social Security), that coverage attends to only a little more than one-half of the Medicare population’s health-care needs, according to EBRI. Not that most Americans are aware of those limitations, IMHO. In fact, I’d be willing to bet that many, perhaps most, assume that Medicare is all the post-retirement insurance they need. Of course, I’m equally sure that many assume that those Social Security checks will provide all the income they need¬ – only to discover too late that it is all they have.

Ultimately, these projections serve to remind us of a couple of key considerations. First, health-care costs need to be contemplated as a part of retirement savings—both because those costs can quickly wipe out funds set aside for living expenses, and because not purchasing the proper amount/kind of health care can have a deleterious affect on your quality of life. Second, one shouldn’t assume that Medicare will address every medical need, any more than you would assume Social Security will comfortably address every living expense. And finally, and perhaps most significantly, “average” is only one point of reality, and one that few of us actually live—or retire—in.

—Nevin E. Adams, JD

See also see “The Lure of Averages”