Retirement Services · $50,000 in retirement savings4, it is unlikely that necessary health care...

Retirement Services

Rising Costs May Put Necessary Care Out of Reach

Challenge for Americans: Saving For Health Care Costs in Retirement

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Contents

Potential Retirement Savings Deficiencies 3

Employees Need To Prepare For Necessary Medical Expenses 4

Health Care Costs Are A Big Concern 6

Health Savings Accounts (HSAs) Supplement Retirement Savings 8

Financial Wellness Programs 9

Supporting Your Plan Needs 10

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Potential Retirement Savings Deficiencies

Health care will likely be the most costly expense employees will face during their retirement years — premiums alone are projected to cost a healthy 65 year old couple nearly $321,0001. And, these costs are expected to continue to increase. For example, inflation for health care is projected to rise at a rate twice that of Social Security cost of living adjustments (COLAs)2, putting retirement security for many in jeopardy. Employees are already struggling to save adequately for their future needs. Concern for outliving one’s retirement savings is high, and many face a declining standard of living in retirement. Medicare doesn’t cover several critical health needs, and many individuals may be overlooking the additional savings that will be necessary for medical care.

It is critical employees address these savings deficiencies before it’s too late. If they are not including health care as a part of their retirement savings strategy, they may be taking a big risk with their future financial security. With increased savings, however, affording health care in retirement can be attainable.

1 HealthView Services: 2017 Retirement Health Care Costs Data Report, 2017


Health care premiums are projected to cost

a healthy 65 year old couple

$321,000

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Employees Need To Prepare For Necessary Medical Expenses


4 Employee Financial Wellness Survey, PWC, 2017

Health care is costly, and it’s expected to rise even further in the future — as well as with an individual’s age. The savings required to fund 20, 30, or more years of health-related needs in retirement is quite substantial. HealthView Services estimates that a healthy 65 year old couple will spend $404,000 during retirement on Medicare Parts B and D, supplemental insurance, dental insurance, deductibles, copays, hearing, vision, and dental cost sharing. The amount is estimated to be even higher — nearly $500,000 — for a healthy 55 year old couple, and over $635,000 for a healthy 45 year old couple, retiring at age 65.3 Furthermore, the cost of long-term care, which is not covered by Medicare, is not even included in the estimates. When you consider that almost half of employees have less than $50,000 in retirement savings4, it is unlikely that necessary health care will be within reach during their retirement years.

Women’s retirement security is in even greater jeopardy. They will need additional retirement and health care savings as, on average, they can expect to live two years longer than men. Additionally, those who are healthy are at as much risk as those who are not — longevity is the biggest driver of lifetime health care costs.

Women’s retirement security

is in evengreater

jeopardy

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To make matters worse, health care cost inflation is expected to multiply rapidly. Inflation is the main cause of the steep increase in health care costs, and according to HealthView, health care cost inflation is expected to rise an average of 5.47% annually through 2025.5 While COLAs have typically been outpaced by health care inflation since 1975, the COLA in 2017 was just 0.3%. Social Security COLAs are expected to increase 2.6% in the future, but that is still less than half the average increase of health care inflation.6

HealthView also estimates that Social Security benefits will only fund a portion — or much less — of health care costs. For the same couples noted previously, health care expenses will consume 59%, 92%, and 122% of the Social Security benefits for the 65, 55, and 45 year old couples, respectively.7

If employees are not factoring the cost of health needs into their retirement savings strategy, they will likely come up very short. However, those who act early to build savings increase the likelihood they will save enough and at a more manageable savings rate.




Projected total health care costs for a healthy 65-year-old couple

retiring this year:

$404,000In today’s dollars includes Medicare

Parts B and D, supplemental insurance, dental insurance, deductibles, copays,

hearing, vision, and dental cost sharing.

HEALTH CARE COST INFLATION IS EXPECTED

TO INCREASE AT TWICE THE RATE OF SOCIAL

SECURITY COLAs:

0.0

5.5

5.47%

Health carecost inflation

2.6%

Social Security COLA

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Health Care Costs Are A Big Concern

The price of health care is a big concern among employees. Two out of three retirement concerns named by employees are health related. All employees place health care costs (27%) as a top three concern behind running out of money (42%) and health issues (33%).8 Most employees (64%) believe health care costs will impact their retirement. This includes 57% of Baby Boomers, 69% of Generation X, and 65% of Millennial employees.9

Delaying retirement to a later date is one such impact. Overall, 43% of employees plan to retire later than previously planned, including 53% of Baby Boomers, 42% of Gen X, and 36% of Millennials. Thirty-one percent of Baby Boomers delay retirement to keep their health coverage. However, the chief cause this group names for a retirement delay is the “need to save more” (47%).10

Many pre-retirees feel they are unprepared for health care’s financial impact. Over 40% of Baby Boomers retiring in the next five years are not confident they’ll be able to cover medical expenses. Many (42%) also admit they do not know how much they need overall for retirement.11





Running out of money#1 Health Issues#2 Health Care Costs#3

Top Retirement Concerns:

SOURCE: Employee Financial Wellness Survey, PWC, 2017

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Health care costs aside, employees are not saving enough. One in four is not currently saving, and 40% have less than $50,000 in set aside for retirement.12 Overall, retirement confidence is low — only about half (49%) are confident they will be able to retire when they want.13

Retirement and other financial concerns can hurt employees’ health and on the job performance. Over half (53%) report they are stressed about their finances, and 30% say personal finances have been a distraction at work.14

Affording necessary health care in retirement is possible, but employees must prepare now. Understanding the price of future health needs is a start, along with making adjustments to their overall retirement plan to include a health care savings strategy. Employees can be better prepared — at a more manageable rate — by increasing their savings earlier. Employers can help by making financial benefits and education available.

Workplace Retirement Plans Help Build SavingsEmployer-sponsored retirement plans help employees prepare well for the future. Those with access to one are more likely to be saving for retirement, have higher account balances, and have higher retirement confidence. Financial benefits like retirement plans are also found to increase productivity and loyalty, and reduce financial stress.

Using best practices in plan design can also encourage employees to save early and save more. Automatic plan features, attractive match formulas, and a plan investment lineup that considers the investing needs of your workforce can all drive better savings.




Retirement confidence is low,

only about half are confident they will be able to retire when they want.

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Health Savings Accounts (HSAs) Supplement Retirement Savings

Employees with a high-deductible health care plan (HDHP) are eligible to use a Health Savings Account (HSA) to save for current out-of-pocket medical expenses. With attractive tax benefits, account balances that can be carried over year-to-year and move with employees from job-to-job, and leftover money that can remain in the account to grow and accumulate over time, HSA savings can nicely complement employees’ 401(k) plan savings. HSA savings can be applied toward the future cost of Medicare parts A, B, and D, copays, prescriptions, and other eligible health needs.

H Health Savings Account Eligible Expenses

1234 5678 9012 345612/31VALID

THRU

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Financial Wellness Programs

Some employees want to save, or save more, for the future but current expenses and debt hold them back. Many also need help understanding employer benefits and how to best use them. For example, just half of employees with HSA access are contributing to one15, and many are not using it as an opportunity to bank additional savings for future medical costs.

Financial wellness programs can help employees build essential financial skills, from budgeting and debt management to retirement planning and saving for health care. The true future cost of health care can be highly variable and difficult to predict. Tools that estimate these expenses help employees understand the impact on their retirement savings so they can better prepare.

Financial wellness programs work. Those who have used them say these services have helped them: prepare for retirement (44%), manage spending (44%), save for major goals (35%), pay off debt (33%), better manage investments (26%), and better manage and save for future health care expenses (13%).16

Employers may also find financial wellness programs benefit their business. Workers feel more loyal to companies that care about their financial well-being, and reduced financial stress can lead to greater productivity.17




Financial wellness programs can help employees

build essential financial skills

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Supporting Your Plan Needs

Retirement benefits aren’t just about planning for the future. They are about attracting and retaining a motivated, productive workforce, day in and day out. ADP’s deep Human Capital Management knowledge means we make it easy for clients like you to create a successful retirement plan for your workplace.

About ADPEmployers around the world rely on ADP® (NASDAQ: ADP) for cloud-based solutions and services to help manage their most important asset — their people. From human resources and payroll to talent management to benefits administration, ADP brings unmatched depth and expertise in helping clients build a better workforce. A pioneer in Human Capital Management (HCM) and business process outsourcing, ADP serves more than 625,000 clients in more than 100 countries. ADP.com.

Retirement benefits are about attracting and retaining

a motivated, productive workforce

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For more information about ADP retirement plans or how we make them easier to manage, please contact a Retirement Services District Manager or visit www.adp.com/401k.

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www.adp.com/401k ADP Retirement Services 71 Hanover Road Florham Park, NJ 07932

The surveys, studies and other resource materials cited herein have been prepared by and are the property of the third parties named herein and are accurate as of the date prepared. The views expressed in this publication are those of the author, are intended for general information only and are not intended to provide investment, financial, tax or legal advice or a recommendation for any particular situation or plan, nor is this publication the sole authority on any regulation, law or ruling. Unless otherwise agreed to in writing with a client, ADP, LLC and its affiliates (ADP) do not endorse or recommend specific investment companies or products, financial advisors or service providers; engage or compensate any financial advisor or firm for the provision of advice; offer financial, investment, tax or legal advice or management services; or serve in a fiduciary capacity with respect to retirement plans. ADP is not responsible for the content of, nor has it verified the accuracy of, any information obtained or the methodology used by such third parties or published in this whitepaper. Please consult with your own investment, financial, tax and legal advisors to the extent you deem appropriate in light of your own circumstances.

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