Vanguard Personal Advisor Services® sat down with our advisors and other experts to discuss your most pressing questions on topics such as taxes, health care costs, and retirement transition. This ongoing series will provide guidance to help you navigate challenges, make informed decisions, and meet your financial goals.
In these 4 videos, we'll share how we can help you estimate health care expenses, identify impacts to your strategy, and build a personalized plan that's right for you.
CFP®, CTFA
Health care costs in retirement
Get the big picture on health care costs.
A question I get all the time as an advisor is how much do I need to save for health care expenses in retirement? Any expense added up over time can feel extreme, even food and clothing. A way to make it more manageable is to break it down as an annual or even a monthly expense.
As a financial advisor, I like to put together a plan that can make it feel in reach. There are a number of factors that contribute to your out-of-pocket health care expenses in retirement. One being your age. So somebody who's retiring at the age of 67 can easily transition onto Medicare, or maybe somebody who's retiring at the age of 63 has a couple more years before they're eligible for Medicare. They'll need to look at maybe their state exchange or Cobra to bridge the gap.
Next is your income. Your Medicare Part B and D premiums are based off of your modified adjusted gross income. So the higher your income, possibly translates into higher premiums than those with lower incomes. Next is your health. So depending how healthy you are will determine how often you're visiting the doctor and what type of health care plan you'll select.
Typically healthier individuals go with a plan where maybe the premiums are not so high or maybe don't see as much out of pocket expense, compared to those with maybe two or more chronic illnesses, or somebody visiting the doctor more than 10 times a year. And as my 80 and 90-year-old clients often tell me not to get old, you end up spending more time at the doctor than when you're younger.
And lastly, long term care can certainly play a role into your out-of-pocket expenses. Our research shows that over 50% of retirees may need some form of long term care. And that costs range could be anywhere from 60,000 to over 300,000 in one's lifetime.
Working with an advisor we can go through all these different scenarios to get a sense for what those expenses can look like and build them into your retirement plan. So you have the confidence that you can maintain the lifestyle that you want and enjoy yourself in retirement.
Transitioning to retirement
How do age and timing affect your strategy?
Transitioning into retirement is a milestone. This is a moment in life where everything you worked for and everything you planned for in your professional life becomes real. And it looks a little different for everyone because everybody does it on their own unique timeline.
My client, Mary, was a fraud investigator for over 30 years. And Mary had a really demanding schedule-- early mornings, travel across the country, and really long days. During one of our meetings, Mary shared with me how her demanding schedule was really starting to weigh on her, and she was considering an early retirement. She was ready to focus on herself and really do the things that she missed out on.
As her advisor, I brought up her health care coverage. Now Mary was only 61, and she wouldn't qualify for Medicare until age 65. At this point, Mary had to think about health care costs. Does she go with her COBRA plan? Does she go with a state exchange, where there's a lot more work involved to figure out what plan and the costs involved?
Together we looked at the different plans that Mary was considering. We looked at the expenses of each plan and factored those into her retirement plan. When Mary turns the magic age of 65, she'll qualify for Medicare. And here there's a number of plans to choose from, and it can actually feel pretty overwhelming.
In personal advisory services, we've designed a tool called Medicare Match that will help you make an informed health care decision. It's there for clients who are picking their plan for the first time, or those looking to re-evaluate their coverage. The key points with Medicare is the initial enrollment period is a seven month time period-- three months before you turn 65, the month of, and three months after.
With the help of our exclusive tools of Medicare Match and Health Care Estimator, we can help get a sense for what your out-of-pocket expenses could look like, we could incorporate them into your retirement plan, stress test your portfolio under various market conditions, so you have the confidence that you can maintain the lifestyle that you want and enjoy yourself in retirement.
Remember, you're not alone. In personal advisory services, we are here to help you and partner with you to navigate through your retirement years.
External & existing factors
What external and/or existing factors can affect cost?
Nobody wants to feel confused about how much they'll need to save for health care costs in retirement or about whether or not they're picking the right plan. There are a few different factors that can affect the kind of health care plan you'll need in retirement and how much you might pay out of pocket. One factor is location. Traditional Medicare costs the same no matter where you are in the country.
But when it comes to supplemental plans, private insurance, Medigap plans, they can vary. They can vary depending on the state that you live or even within the state. I have two clients, Earl and Maryanne, who've been retired for a few years. In one of our meetings, they shared with me this amazing opportunity that they had. They had to travel abroad and teach music to elementary school kids.
At first, we were just talking about the fun parts of the experience. Later on in the conversation, as their advisor, I brought up their health care coverage, and I asked them if their health insurance covered them if they were abroad or even just across the country, and they weren't sure. So our conversation became about their health care coverage. I wanted to make sure they had access to health care coverage no matter where in the world they were. Nobody wants to be doing a gig in Barcelona, not feeling well, and all of a sudden you're sick in a foreign country, and you don't have any insurance.
The next factor is income. Your Medicare Part B premiums are based off of your modified adjusted gross income. Now, you may wonder, what is modified adjusted gross income?
It's just a sum of all of your different income sources. It could be Social Security, pensions, distributions from IRAs, rental income, even portfolio income. So when it comes to the premiums, they're based off of what that amount is. The higher the income, the higher your Medicare Part B premium could be.
When thinking about health care costs in retirement, it is going to be based off of your health care needs. So if you're going to the doctors 10 times or more, or if you have two or more chronic illnesses, you can probably expect to pay more in health care costs. If you're fairly healthy, not really visiting the doctor too much, you can probably expect to pay less in health care costs. Your advisor is here to give you clarity, but more importantly, to give you the confidence in what you're doing so that you can get to the fun parts of retirement faster.
Long-term care (LTC)
What should you consider when it comes to LTC in retirement planning?
At a moment in life where people may need ongoing care and ongoing help, everyone deserves to feel safe and secure about how they'll afford it.
I have a client, Cindy, who's in her mid-80s and single and lives alone. Cindy lives in a continuing care retirement community. She lives off of her portfolio and her social security benefits.
During a meeting, the markets were pretty volatile, and Cindy was nervous and upset. So at the beginning of our conversation, we were just talking about what was causing the volatility in the markets and how the state of our economy was. I started then asking questions that had nothing to do about the markets at all.
Cindy was concerned that if the markets were down, she wouldn't be able to afford to live in the retirement community. She's made great friends. The staff is really friendly. And she really enjoys the care that she receives. Her concern was, how would I afford this care if the markets don't cooperate?
Our research shows that only about half of retirees end up needing long-term care. But if you do, the cost can range from $60,000 to over $300,000 in your lifetime. If you think you might need long-term care down the road, you may want to consider insurance. So just like car insurance, you would pay a premium each year. And just keep in mind, the provider may increase your premiums. You want to make sure you'll be able to afford both.
Another type of insurance is considered a hybrid policy, where you're taking two separate insurances and marrying them together-- long-term care and life insurance. With life insurance, you have a death benefit and a beneficiary. Upon your passing, your beneficiary gets a lump sum of money.
With long-term care, there's a pot of money available for your care later on in life, if you need it. If you don't need it, upon your passing, your beneficiary will get that lump sum of money.
Then there's self-insurance, the path that my client, Cindy, took, where she's relying on her portfolio to cover any out-of-pocket expenses. So the first step we'll have you go through is our health care estimator tool. We'll get a sense for what your expenses can be.
Next, will put them into your expense worksheet and then stress test your portfolio. We want to make sure you're able to maintain your lifestyle. If your assets are below a certain level, you'll be eligible for Medicaid, a government health insurance program that does cover long-term care for low-income Americans.
As an advisor, I can help you work through all this, just like I did with my client, Cindy. We threw in some what-if scenarios, stress tested her portfolio under various market outcomes, and concluded that Cindy could receive the care that she wanted regardless of the market outcome. As an advisor, hearing the relief in Cindy understand why her lifestyle didn't have to change is why I love my job.
Notes:
All investing is subject to risk, including the possible loss of the money you invest.
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