Planning for Health Care Costs in Retirement

My Comments: Chances are once you’re old enough to file for Social Security benefits, among the financial threats you face going forward is paying for the health care costs you’ll likely have to deal with for the rest of your life.

The following points to consider come from a Vanguard Funds research report published in June of 2021. I tried to provide a link but for some reason, it would not be copied. So, I encourage you to do a simple internet search using the title above and include the word Vanguard. It should come up for you.

Meanwhile here are four primary takeaways from the published report and following comments. Pay particular attention to the last sentence in paragraph 2 near the bottom.

  • Planning for annual health care insurance premiums and out-of-pocket expenses at retirement should be distinct from planning for long-term care expenses.
  • Some research estimates health care costs in retirement as a lifetime lump sum. We believe a better planning framework considers these costs as annual expenses personalized to an
    individual’s health status, coverage choices, retirement age, and loss of any employer subsidies. For a typical 65-year-old woman, the Mercer-Vanguard model predicted an annual health care expense of $5,100 for 2020.
  • During their working years, some people should save at higher rates to account for potential future incremental health care spending. This group includes those with generous employer
    benefits that may not be offered in retirement and those with higher risk of chronic conditions because of family history or current health status.
  • Long-term care costs represent a separate and difficult planning challenge because of the wide distribution of potential outcomes. Half of the population will never incur them—but everyone faces a small but meaningful risk of requiring costly care for multiple years.

Academics and industry experts have placed a spotlight on health care costs that U.S. households can expect to incur during retirement. Most Americans realize that annual health care costs have been growing faster than inflation for some time; workers see this as they experience rising premiums and out-of-pocket costs in their employer benefits. They also know they will likely consume more services each year as they age. Pre-retirees and retirees are concerned about how these costs will affect their retirement and how they will pay for them. Thirty percent of workers surveyed are not confident they will have enough money for health care during retirement; this percentage was higher than the number who fear they will run out of money for any other reason.

As presented by leading experts, the numbers are alarming. Since at least 2003, the Employee Benefit Research Institute (EBRI) has been quantifying the amount individuals will need to have saved to cover total health care premiums and out-of-pocket health care costs throughout retirement. The EBRI analysis has evolved over the years and now focuses on the figure needed for a 65-year-old couple desiring a 90 percent chance of having enough savings: a daunting $270,000The EBRI estimate does not factor in any long-term care expenses. About half of the population will need paid long-term care4 such as adult day care, homemaker services, home health aides, assisted living facilities, and nursing-home care. The costs are justifiably a primary worry for many U.S. retirees: The national average for private-room nursing-home care is more than $8,800 per month.

To better understand the financial planning implications of annual health care costs and long-term care expenses, Vanguard has partnered with Mercer Health & Benefits to develop a proprietary model to forecast the range of costs for both pre-retirees and retirees. For a typical 65-year-old woman, the model predicted an annual health care expense of $5,100 in 2020 if she purchased a Medicare Supplement Plan G and a standard prescription drug plan. Based on our analysis, Vanguard proposes several important changes to the way that health care costs are typically discussed and modeled.