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Health care in retirement | Vanguard

Maybe not as much as you think! Today’s almost-retirees are confident about what the future holds, but if there’s one thing that worries them, it’s the cost of health care.

And no wonder! There are a lot of big, scary numbers being thrown around out there. But let’s be honest, if you add up your spending for anything over the course of 30 years—food, gas, vacations—it’s going to seem like a lot.

Health care is important to plan for, though. If you’re like most people, an employer has been subsidizing your insurance costs all your life, so your costs may go up once you retire. But never fear. Most years, your health costs will be a relatively stable piece of your retirement-spending pie, making them easy to plan for.

As part of our advice service, you’ll receive a retirement plan that includes a personalized health care estimate for your retirement years, taking into account your health status, coverage choices, retirement location, income, and more.

If you’re already a Vanguard Personal Advisor client, set up an appointment with an advisor to access the health care cost estimator.

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You may have heard that the cost of health care is rising faster than the overall inflation rate, and that’s true, for a variety of reasons. Better technology and newer treatments hit the market every day, and that’s a good thing.

Our research shows you can expect health care spending to double over the first 20 years of retirement. This increase takes into account that most people simply spend more money on health care the older they get. (On the other hand, other expenses like entertainment and travel tend to drop over time. In fact, most people spend less overall the further they get into retirement.)

Your health care costs in retirement depend on a few factors. The good news is that you have some control over most of them!

Here are the 6 biggest factors according to our research.

It’s no surprise that the worse your health (or your family’s health history) is when you enter retirement, the more you can expect to spend.

3 questions to consider:

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

If you answer “yes” to at least one question, you should plan to spend a larger portion of your retirement income on health care. However, if you don’t have any chronic conditions (and no family history), you’ve never smoked, and you don’t go to the doctor often, you can probably plan to spend less than average.

There’s a big difference in price tags between the most expensive locations and the cheapest. Traditional Medicare coverage is the same everywhere, but prescription coverage (Part D), Medicare Advantage (Part C), “Medigap” supplemental plans, and private insurance vary, sometimes even within the same state.

For example, premiums for one supplemental plan* cost more than twice as much per year in the highest-cost area ($3,348) vs. the lowest-cost area ($1,488) in 2018.

Retiring before age 65 sounds great, but it means you may have to come up with other coverage until you’re eligible for Medicare, the government-sponsored, subsidized health insurance program for retirees.

Here are some options:

  • Stay on a spouse’s plan. If your spouse or partner is still working and has employer-sponsored coverage, this is likely the cheapest way to stay insured.
  • Stay on your former employer’s plan. If you retire within 18 months before you become eligible for Medicare, you can use COBRA coverage to bridge the gap. It’s the same coverage you had while working, but your employer won’t subsidize it anymore, so your costs will increase.

    If you’re really lucky, your employer may also offer you continuing coverage as part of your retirement package. Win!

  • Buy insurance on the open market or through a professional association. All states now have exchanges where you can buy coverage from private insurers, and many associations offer group insurance coverage. This is likely your most expensive option, unless you qualify for tax credits.

How premiums vary

Bar chart showing that for most people, health insurance will get much more expensive if they retire before age 65, and then drop somewhat when they are eligible for Medicare.

For a medium-risk woman. Marketplace cost based on Silver plan. Medicare cost based on traditional Medicare plus Supplemental Plan F. Source: Mercer-Vanguard health care cost model, 2018.

Read chart description

You’ll need to make a number of decisions about your coverage.

  • When it’s time to enroll in Medicare, you’ll decide between Traditional Medicare or Medicare Advantage. If you choose Traditional Medicare, you might want to add Medigap coverage—and there are many plans to select from. Either way, you’ll also need to decide if you want prescription coverage as well.

Find out more about choosing a Medicare plan

  • If your Medicare option doesn’t cover dental and vision costs, you’ll need to decide whether you want to buy separate coverage.
  • You may also consider how to cover long-term care since Medicare doesn’t cover those costs. We’ll talk more about that later.

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.

Right around the time you’re putting up your fall decorations every year, make sure to revisit your coverage. Open enrollment is October through December, when you can make changes to your Medicare choices.

If you’ve saved exceptionally well for retirement or you’re still working after enrolling in Medicare, you may pay more in premiums because the government won’t subsidize your costs as much. The income levels you’ll need to hit to trigger surcharges are high, though—$85,000 for an individual or $170,000 for a married couple.

If your income is really high, your extra charges could be about $4,800 per year.

Extra cost of premiums (per year) based on income

Graphic showing how Medicare premiums increase if your income is high.

Income brackets are for a single person. If you’re married filing jointly, the amounts are doubled, except for the highest bracket, which begins at $750K for married filing jointly. Figures are for 2019.
Income refers to modified adjusted gross income. Source: medicare.gov.

Read chart description

If an employer has been carrying part of the weight of your health care costs, the loss of those subsidies can make your retiree health insurance costs feel much higher.

On average, our research shows that a 65-year-old woman will lose more than $5,000 a year in employer subsidies at retirement.

How do employer coverage and Medicare work together?

You’ll qualify for Medicare at age 65 even if you’re still working or have retiree health benefits through your employer or other coverage through a spouse who’s still working.

Whether you decide to enroll as soon as you become eligible depends on your specific situation. For more information, see medicare.gov.

Enrolling in Medicare when you have employer coverage External site

Once you’ve taken all 6 factors into account, how does it shake out? Our advice service can give you a personalized estimate, but the charts below should give you a rough idea. Select a chart based on your income level and choose your level of health risk to see what the median total costs are with or without a supplemental plan.**

Sample yearly costs for people who don’t have additional premium charges due to high income

Bar chart showing median annual costs for people with different levels of health risk and coverage types, assuming they don’t have to pay additional premium charges because of high income.

For a 65-year-old woman. Source: Mercer-Vanguard health care cost model, 2018.

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Sample yearly costs for people who pay maximum additional premium charges due to high income

Bar chart showing median annual costs for people with different levels of health risk and coverage types, assuming they pay the maximum additional premium charges because of high income.

For a 65-year-old woman. Source: Mercer-Vanguard health care cost model, 2018.

Read chart description

A health savings account (HSA) is a flexible and tax-efficient way to save for current and future health care expenses.

Contributions are pre-tax (both federal and state) and withdrawals for qualified medical expenses (including Medicare deductibles and premiums) are tax-free.

Find out more about the benefits of an HSA

Learn more about HSAs that offer Vanguard investments

You should plan for the possibility you’ll need long-term care separately from your ongoing health care expenses. Unlike the costs we’ve discussed above, there’s an enormous variance in potential long-term care costs, from nothing to hundreds of thousands of dollars. We can help.

Learn more about planning for long-term care

As part of our advice service, you’ll receive a retirement plan that includes a personalized health care estimate for your retirement years, taking into account your health status, coverage choices, retirement location, income, and more.

If you’re already a Vanguard Personal Advisor client, set up an appointment with an advisor to estimate your health care costs.

Get more with advice from Vanguard

How much will you pay for health care in retirement?

Retirement health care costs: Breaking it down

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