The New York Times recently reported that the share of Americans with health insurance declined in 2018 — the first drop in this statistic since 2009. For many Americans, health care costs are a major cause of stress and worry, but even more so for those approaching or in retirement.
The mere thought of health care costs when planning for retirement can be overwhelming, but they may not be as disrupting as many fear. Even though health care costs tend to increase with age, they eventually level off and even take the place of other expenses.
What Can Americans Expect to Pay in Health Care Costs in Retirement?
A recent Vanguard study that we will reference throughout this article suggests that a typical 65-year-old woman can expect an annual expense of around $5,200 (premiums and out-of-pocket) in 2018. This is a total cost figure, not an incremental cost to what you are already spending on health care.
Long Term Care (LTC) is another common concern for individuals and should be considered separately when estimating health care costs. The study suggests that only around 50% of individuals incur LTC expenses, and a quarter will consume less than $100,000 in LTC expenses.
While we can use these figures as a benchmark for what to expect, costs will vary widely per individual depending on health and many other unique circumstances.
Building a Framework for Planning Health Care in Retirement
The objective of this piece is to build an actionable framework that can serve as a guide when planning for health care in retirement. The framework consists of four key components:
- The Approach
- Coverage Considerations
- A Personalized Estimate
- Making it Actionable
Leveraging the holistic planning tools offered through the Personal Capital dashboard is a good way to incorporate this framework.
Vanguard recently teamed up with Mercer Health to develop a new model to forecast health care costs and to provide guidelines for how to address these costs within retirement planning (see study). The study suggests that individuals should focus on annual cost figures and incremental changes, not projected lumpsums.
There should also be a distinction between planning for annual health care insurance premiums and out-of-pocket expenses from planning for long-term care expenses. The approach should be personalized within the context of an individual’s health status, retirement age, coverage choices and employer subsidies.
Determining future costs will be highly subjective to your current health situation, potential health risks and your coverage options, but these things should become clearer as you near retirement.
Start by looking at your current health care plan and compare it to your Medicare coverage choices. This will help you determine what coverage you would like and will help identify coverage gaps.
During your working years, your coverage plan is either through an employer or the individual insurance market (see Healthcare.gov). If you are covered by an employer sponsored plan, check to see if your plan offers supplemental continuation coverage in retirement. Be aware that continuation coverage plans are often less generous and subject to change, so for most of us, not an option. Most individuals will rely heavily on government-sponsored plans such as Medicare for health care in retirement. Part of this cost is likely already being deducted from your paycheck for when you become eligible at age 65 (see Medicare.gov to check eligibility and calculate estimated premiums).
Coverage Gap: Retiring Before 65
One potential gap in coverage to consider is if you plan to retire before age 65. This period would have to be covered through private insurance. If you currently have a generous employer sponsored plan, you may not need to maintain that level of coverage through retirement and should assess if it makes sense to downgrade your level of coverage at retirement to decrease your costs. COBRA Insurance is another potential solution for this period of lapsed coverage, where you can extend your current employer coverage for 18 months. But keep in mind, using COBRA Insurance means you would be on the hook for the entire bill (including your employer’s portion and additional admin fees).
Retirement Coverage: Age 65 and Over
When Medicare does kick in, understand that Original Medicare only covers basic expenses and you will likely need to add additional coverage or supplemental insurance.
Here is how Medicare Works:
Original Medicare benefits are divided into two parts, Part A (hospital insurance) and Part B (Medical Insurance). Once you enroll in Medicare, you automatically receive Part A benefits for no additional premium with the option to add Part B or Part C (Part C includes both A & B) for a monthly premium. Part C Medicare Advantage Plans are contracted out to private companies and usually also offer prescription drug coverage. If they don’t, then prescriptions drug coverage falls under Part D at an additional cost. You may also need to add a Medigap policy that is supplemental to Part A and Part B and meant to fill in the gaps of coverage.
Low-cost or free health insurance through Medicaid may also be an option if you fall under a mandatory eligibility group. Personal Capital recommends retirees should review their coverage options carefully and revisit them annually.
Long-Term Care Coverage Considerations
Long-term care insurance is another cost to consider. The U.S. Department of Health and Human Services determined that about 70% of people turning 65 will need LTC coverage at some point. The difficulties with planning for LTC are the unpredictability, high cost, vast array of expenses, and general lack of coverage by health insurance. The majority of LTC costs are paid out of pocket but having a support network of family to help take care of you, can help avoid some of these expenses.
Personalize Your Estimated Cost
The cost for individuals varies widely — the major variables when estimating your health care costs are health status and health risk. Some other factors include geography, age at retirement, Medicare coverage options, possible Medicare surcharges, income levels, and if your employer offers health insurance subsidies in retirement.
The Vanguard-Mercer cost model calculates that a typical 65-year-old woman, if purchasing a Medicare Supplemental Plan F and a standard prescription drug plan, can expect an annual expense of $5,200 in 2018. To gauge where you might fall, see the charts below that show expected cost ranges by health circumstances.
Typically, health care costs are accounted for as part of your retirement spending needs within your financial plan. As you progress through your retirement lifecycle, your spending tends to decrease (modeled in our “Retirement Planner” tool as an adjustable 1% annual decrease). This is true despite increases in health care costs with age (attributed to both increased consumption and above inflation growth) due to the substitution effect (spending less in other consumption areas).
Using Personal Capital’s Retirement Planner can help you project these costs throughout your retirement. The flexibility of the tool also allows you to model health care costs separately from retirement expenses if preferred (but make sure to back it out of your spending goal if you do to avoid double counting).
We encourage you to talk with a Personal Capital advisor to help you estimate your required replacement ratio and if you need to make any changes to your current financial plan. They can also serve as a resource regarding some creative planning tactics like using a health savings account (HSA) as an investment vehicle to save for health care expenses.