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6 factors affecting your retirement health care costs

Learn about the 6 factors that affect health care costs in retirement.
9 minute read
April 12, 2024
Health care
Cost of health care in retirement

How to predict and prepare

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

Average health care costs, even with Medicare, could surpass $5,000 per year, according to a model we developed in partnership with Mercer Health & Benefits.1 And although costs vary substantially from person to person, it's possible to estimate what yours might be—and then plan for them.

As an advisor, I collaborate with my clients and educate them as they move closer to and through retirement. The more we plan, the more they feel at ease when it comes time to retire.

3x as many investors report having peace of mind because of their advisor.

Source: Vanguard, Quantifying the Investor's View on the Value of Human and Robo-Advice (Paulo Costa, Ph.D., and Jane E. Henshaw, 2022). Advised investors were asked about their level of peace of mind with their advisor as well as how much peace of mind they imagined having on their own. They could rate peace of mind from 0 ("No peace of mind at all") to 10 ("A great deal of peace of mind") and were considered to have peace of mind if their rating was between 8 and 10. 

How much money you'll need for health care may be the biggest unknown expense you'll have in retirement—and how you prepare could determine how long your savings last.

So what comprises the model that drives our personalized estimates? Many factors 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), carefully review the available plans and choose one that's right for you based on your individual needs.

Costs vary based on coverage. When considering your options, think about whether you'd prefer to pay higher premiums (and additional premiums for extra policies) to increase the predictability of your out-of-pocket costs. 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.

If you need guidance around your Medicare decision, getting in touch with our advisors is a great start. They have several resources that can help you narrow your plan selection based on your priorities.

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 have an unhealthy diet?
  • Do you refrain from exercise? 
  • 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. Keep in mind, however, that a higher health risk can also increase the likelihood you'll need long-term care. Fortunately, many 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.

An advisor can help you determine when to start planning for long-term care. There are risks to planning too late—but also too early. We can help you set an ideal time frame based on your personal circumstances. My goal for my clients is for them to feel confident and in control of their financial destiny. For some, this may include a long-term care insurance plan. For others, a separate investment account may make sense.

3. Retirement age

Some of my clients have a goal to retire early. With unpredictable economic factors such as inflation and market volatility, knowing how much to save can be difficult. As an advisor, I use financial planning tools to examine considerations related to my clients' retirement options, such as Social Security, tax-efficient withdrawals, and health care saving contributions. This helps ensure they're saving enough to cover their health care expenses during those gap years before they're eligible for Medicare.

To determine how much they should save, we discuss their health care coverage plans.

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 allows workers and their families to continue health benefits under their group plan.2 However, COBRA costs more than what most employees pay for health care before they retire. Additionally, COBRA usually only lasts for 18 months, so if you retire before you're eligible for Medicare, you may have to use a combination of different health care sources.

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 research to see what makes sense for you.

And since asset location and tax-loss harvesting can help lower a person's modified adjusted gross income, you might qualify for cost-lowering health care subsidies like those under the Affordable Care Act. As fiduciaries, our financial advisors can help navigate the complexities with your best interests in mind. 

My goal for my clients is for them to feel confident and in control of their financial destiny. For some, this may include a long-term care insurance plan. For others, a separate investment account may make sense.

—Mark Vandenburg, CFP®, Senior Financial Advisor

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.3 If that's the case for you or your spouse, you might need to bridge that gap with other funding.

A Health Savings Account (HSA) may help. If you have an HSA, you can use the money you withdraw for medical expenses—or pay out of pocket from your retirement savings. The decision is yours.

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 region to region within the same state.

6. Income in retirement

If you plan on working after enrolling in Medicare or 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—$103,000 for individuals and $206,000 for married couples in 2024.4

What to consider when you pick a Medicare plan

When researching available plans, think about what each offers and how they match your needs:

  • Look for 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. Based on your eligibility, explore this offer further. Call us at 855-666-2887.

Need help estimating your retirement health care costs?

With Vanguard Personal Advisor®, you get anytime access to advisors who are fiduciaries—always acting in your best interests. We'll help estimate your future costs and customize a plan based on your specific goals, needs, and situation. Our advisors are here for you. Based on your eligibility, explore this offer further. Call us at 833-339-1619 to get started.

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1Vanguard and Mercer Health & Benefits, Planning for Health Care Costs in Retirement, June 2021.

2U.S. Department of Labor, FAQs on COBRA Continuation Health Coverage for Workers.

3KFF (Kaiser Family Foundation), Employer Health Benefits: 2021 Summary of Findings (PDF).

4U.S. Department of Health & Human Services, 2024 Medicare Costs (PDF).

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Vanguard does not provide legal or tax advice. This information is general and educational in nature, should not be considered legal or tax advice, and is not tailored to the investment needs of any specific investor. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Vanguard cannot guarantee that this information is accurate, complete, or timely. Vanguard makes no warranties with regard to such information or results obtained by its use and disclaims any liability arising out of your use of, or any tax positions taken in reliance on, such information. We recommend that you consult a tax or financial advisor about your individual situation.

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