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Planning for retirement

6 factors affecting your retirement health care costs

Learn about the 6 factors that affect health care costs in retirement.
10 minute read
September 19, 2022
Planning for retirement
Cost of health care in retirement
Health care
Retirement income
Early retirement

How to predict and prepare

Have you included your expected health care expenses in your retirement plan?

According to a model we developed in partnership with Mercer Health & Benefits, average health care costs, even with Medicare, could surpass $5,000 per year.* And although costs vary substantially from person to person, it’s possible to estimate what yours might be—and then plan for them.

Planning for health care costs before retirement gives my clients a bit more control. The more we plan, the more they feel at ease when it comes time to retire.

How much money you’ll need for health care is the biggest unknown expense you’ll have in retirement. Once we tackle that—and how it may change throughout the years (gap year coverage, Medicare at age 65, and potential long-term care costs)—it makes for a much smoother transition.

So what comprises the model that drives our personalized estimates? There are many factors that affect health care expenses, but according to our research, these are the 6 most important.

1. Medicare choice

When it’s time for you to enroll in Medicare (at age 65), review the available plans carefully and choose one that’s right for you based on your individual needs. You’ll reenroll each year around the same time, so you’ll be able to reevaluate your plan and choose a different option to address your evolving needs.

When you enroll, you’ll need to make numerous decisions about your coverage, such as choosing between traditional Medicare and Medicare Advantage. If you select traditional Medicare, you might need to add Medigap coverage—choosing from a list of policies. You’ll also have to decide if you want added prescription coverage, as well as dental and vision coverage if your plan doesn’t cover them.

Costs vary based on coverage, so you’ll want to be sure not to pay for more than you need. But you also don’t want to pick a plan based solely on cost and end up with inadequate coverage. When considering your options, think about whether you’d prefer to pay higher premiums (and/or additional premiums for extra policies) to increase the predictability of your out-of-pocket costs.

Choosing a Medicare plan can be complicated, but we can help. You can find out more in the Retirement section of our website:

Learn about Medicare Parts A to D

If you’d like help narrowing your choices based on your needs, you can use our Medicare Match tool, which is available to Vanguard Personal Advisor clients.

2. Health status

How healthy you are when you enter retirement and your family health history largely determine the Medicare coverage you’ll need and how much you can expect to spend on health care.

A few questions to consider:

  • Do you smoke?
  • Do you visit the doctor often (at least 10 times a year)?
  • Do you have 2 or more chronic health conditions?

If you answered “yes” to at least 1 question, you should plan to spend more of your retirement income on health care. However, if you have no chronic conditions, have never smoked, don’t go to the doctor often, and have no major health issues in your family’s history, you can probably plan to spend less than the average person.

Keep in mind, however, that a higher health risk can also increase the likelihood you’ll need long-term care. Almost half of retirees don’t end up needing it, but if you do, it can be expensive. You may want to build long-term care into your plan as a separate cost.

Learn about long-term care

3. Retirement age

Some of my clients have a goal to retire early, so I work with them to make sure they’re saving enough to cover their health care expenses during those gap years before they’re eligible for Medicare. To know how much they should save, I need to know what their health care coverage plans are.

One possibility is to stay on your spouse’s employer-sponsored plan, if your spouse is still working. You could also remain on your employer’s plan through the Consolidated Omnibus Budget Reconciliation Act (COBRA), which gives workers and their families the option to continue health benefits under their group plan.** However, COBRA costs more than what most employees pay for health care before they retire. Additionally, COBRA can only be used for 18 months, so you may have to use a combination of different health care sources if you retire before you’re eligible for Medicare.

If an employer-sponsored plan isn’t a possibility, you can buy insurance through the federal marketplace or purchase private insurance. All these options have their own requirements and their costs vary, so you’ll want to do your research to see what makes sense for you.

Planning for health care costs before retirement gives my clients a bit more control. … How much money you’ll need for health care is the biggest unknown expense you’ll have in retirement. Once we tackle that—and how it may change throughout the years (gap year coverage, Medicare at age 65, and potential long-term care costs)—it makes for a much smoother transition.

—Ellie Oligmueller, CFP®, Senior Financial Advisor

What to consider when you pick a Medicare plan

When you’re researching the available plans, you’ll want to think through what each offers and how they match up with your needs. Here are some things to consider:

  • Think about a plan with more coverage if you have health issues.
  • Know the details of each plan’s deductibles, co-pays, coinsurance, and maximum out-of-pocket costs.
  • Find out if your preferred providers or network accepts the plan you want to choose.
  • Consider a plan with foreign travel benefits if your retirement will include international travel.
  • Determine how your chosen plan will work with any employer-sponsored coverage you might still have.

Ready to plan for retirement health care expenses? Our advisors are here for you. Call us at 855-850-6972.

4. Employer subsidy

If you’ve had coverage through an employer-sponsored plan, either yours or your spouse’s, your health care costs in retirement can seem even higher. Research shows that when a worker retires, they lose an average of $6,440 in employer subsidies.† If that’s the case for you or your spouse, you might need to bridge that gap with other funding.

5. Location

Where you live in retirement also affects your health care costs. Although traditional Medicare coverage costs the same everywhere, other expenses such as prescription coverage, supplemental plans, and private insurance can vary from state to state and even from region to region within the same state.

Top 5 states for health care

U.S. News & World Report compiled data from the Centers for Disease Control and Prevention and then used it to show where states were ranked in several key areas related to health care. The graph above highlights the states with the best overall health care rating.††

6. Income in retirement

If you plan on working after enrolling in Medicare or you earn substantial income from your retirement savings, the government may not subsidize as much of your health care costs—it depends on your total income. The income levels you’ll need to exceed to trigger surcharges are high, however—currently $91,000 for an individual and $182,000 for a married couple.

Need help estimating your retirement health care costs?

Working with Vanguard Personal Advisor® gives you anytime access to advisors who are fiduciaries—always acting in your best interests. Call at 855-850-6972.

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*Vanguard and Mercer Health & Benefits, Planning for Health Care Costs in Retirement (PDF), June 2021.

**U.S. Department of Labor, Continuation of Health Coverage (COBRA).

†KFF (Kaiser Family Foundation), Employer Health Benefits: 2021 Summary of Findings (PDF).

††U.S. News & World Report, Health Care Rankings, March 2021.

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