Planning for health care in retirement

1. Get a personalized health care estimate

Incorporating health care costs into your financial plan helps ensure you're well positioned for retirement, even if you should encounter a medical emergency. As part of Vanguard Digital Advisor^® and Vanguard Personal Advisor^®, you have access to our health care tool, which can provide a personalized estimate for your health care and long-term costs to help you more accurately account for those expenses in retirement. Once you have that estimate, you can work on your own or with an advisor to incorporate it into your savings strategy.

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2. Open an HSA

If you participate in a high deductible health plan (HDHP), you may qualify for an HSA. An HSA allows you to set aside and invest pre-tax money and use it to pay for qualified medical expenses. Note that you can't contribute to an HSA if you have health care coverage that doesn't qualify as an HDHP. Once you begin Medicare coverage, you won't be eligible to contribute to an HSA, so take advantage while you can. The sooner you start saving, the more you could benefit.

Among the biggest advantages of HSAs is their triple tax benefits:³

• Contributions can reduce your current taxable income.
• The money grows tax-free within the account.
• Qualified withdrawals—meaning money used for most medical expenses—are tax-free.

Before you reach age 65, you can use the money in your HSA for expenses like copays, deductibles, and medications. You usually can't use this money to pay for insurance premiums, apart from COBRA, Medicare, and long-term care insurance (up to the deductible amount). Once you turn 65, you can use the money in your HSA for anything you want. But keep in mind that if you decide to use it for things other than qualified medical expenses, it'll be considered taxable income.
 

3. Review replacement ratios

The further you are from retirement, the more difficult it is to envision what your spending needs will be. However, projected spending is critical for determining the savings rate you'll need to maintain your standard of living. Financial planners often use replacement ratios—the percentage of pre-retirement income that someone will need to maintain their current lifestyle—to provide estimates of retirement spending needs. They're frequently used to estimate required savings rates. However, many traditional default replacement ratios don't account for increases in health care costs. It's especially important to factor this in if your employer offers generous health insurance benefits.

Typical replacement ratios are between 70%–85%, but all the variables that account for health care costs suggest that accepting a ratio in that range might not be sufficient for those with pre-existing health conditions, a family history of health issues, or those who end up requiring long-term care. So, while you review the replacement issues, don't solely rely on them since your situation may require more.

Learn more about planning for long-term care
 

4. Weigh your Medicare options

Once you get closer to age 65, you'll want to take time to review your Medicare options. When you're eligible, remember to sign up during the designated enrollment period. There's a lot to know about Medicare Parts A, B, and D, Medicare Advantage plans, and Medigap plans. What are the different parts?

• Part A covers hospital costs.
• Part B is optional coverage for outpatient and doctor visits.
• Part C, also known as Medicare Advantage, provides additional coverage by private insurance companies.
• Part D is prescription drug coverage.
• Medigap policies are supplemental policies offered by insurance companies that help cover out-of-pocket costs, such as co-pays and deductibles.

Learn more about Medicare