Navigating retirement health: Care options and costs

To plan for expected and unexpected needs, investors should think about what type of care they may require in retirement, how long they might need it, and what the related costs could be. The investor, along with their financial advisor, can then build those considerations into their retirement plan. 

Almost all retirees will need some type of medical care. This can include regular doctor visits, appointments with specialists, short-term hospital stays, or time in a rehabilitation facility. This type of care is paid for largely by health insurance.

In contrast, long-term care isn’t covered by traditional health insurance. As shown in the graph below, the need for long-term care is more common than many people realize. About one in seven adults will need at least two years of paid long-term care. Along with the emotional considerations, the need for long-term care can also have significant financial implications for retirees and their families.

Projected use of long-term care for people turning age 65 between 2021 and 2025

The uncertainties about the type of care someone might need and how long they might need it underscore the importance of building a retirement income plan flexible enough to handle a wide range of potential health care situations. Our research offers a six-step approach for thinking through the issues that should inform a long-term health-aware plan.

It’s wise for investors to consider their care preferences for a variety of potential scenarios:

• After a hospital stay, do they want to recover at home or in a rehabilitation facility?
• Do they want to age in place with the help of an informal caregiver or in a retirement community?
• How do they prioritize cost, convenience, and personal connection?
• Who will make care decisions for them if they’re unable to do so?

For some investors, the decision may be driven by the lower costs of informal care from an unpaid caregiver, such as a family member, friend, or neighbor, compared with the often-expensive specialized paid care services. For others, the decision may be guided by how they value a personal connection with an unpaid caregiver versus the professional expertise of a paid caregiver. These decisions may also vary based on the type, duration, and frequency of care needed.

“The problems of aging can be hard to think about and talk about. Financial planners can be an important catalyst to help their clients face these questions,” says the research paper’s lead author, Stephen M. Weber, CFP®, CLTC®, a Vanguard investment strategist. “Everyone planning for retirement should understand the who, what, where, and how of their desired care scenario.”

The “how” of that equation includes how health care costs will be paid for. Choosing the right coverage combination will again depend on the type, duration, and frequency of care. Some options include:

• Medical insurance: Medicare covers those age 65 or older, but those who are younger will need to bridge the gap.
• Long-term care insurance: Investors and their advisors might consider additional coverage options like long-term care insurance, hybrid insurance, and supplemental plans.

For investors who choose and have access to unpaid care, there may be services, treatment, and equipment that an unpaid caregiver can’t provide. In such cases, the investor should work with their financial planner to build coverage for those expenses into their retirement plan.

For those who plan to rely on paid care, an evaluation of the available coverage options, limits, and exclusions of each policy can help ensure comprehensive and cost-effective protection.

Health care costs can vary dramatically, based on the volume and frequency of services. People with chronic medical conditions typically consume the most care—and often have the highest costs—while healthier people typically consume less care and incur lower costs. Other factors that affect cost include where one lives (as costs vary by region), Medicare premium surcharges (which are based on income during retirement), and individual provider fees (which vary by provider).

Even for those who have informal care options, there are costs to consider. In-home care may require modifications to make it easier to age in place. It could also require budgeting for paid respite care or a part-time home health aide to help informal caregivers avoid burnout. 

National median annual costs of long-term care by the type of service

A well-designed financial plan should be flexible enough to handle multiple outcomes, including costly long-term care. An advisor can help integrate costs into an investor’s retirement plan by refining retirement savings goals or adjusting an investment strategy.

This is where investors are likely to realize the financial impact of their chosen preferences and priorities. For some, the expected cost of long-term care may require adjusting their budget to ensure sufficient funds. Conversely, those who expect to rely on informal care may need to budget for related care costs like home modifications or paid respite care.

An existing plan may not fully account for the cost of health care expenses in retirement, particularly if long-term care is required. The following strategies can help address potential income gaps:

• Establish a dedicated fund for health care costs.
• Leverage tax-advantaged accounts like a health savings account (HSA).
• Purchase long-term care insurance or an annuity.
• Set up a reverse mortgage line of credit.

These measures can provide access to financial resources to help investors cover care needs without depleting their retirement savings. 

By carefully considering and planning for preferred care scenarios—whether that care is informal or paid—retirees can better manage their health care needs and related costs.

To establish an informal care plan, retirees can coordinate with chosen caregivers to create the plan and schedule regular check-ins. They may also consider caregiver training and support so that their loved ones are equipped to provide appropriate care.

If a continuing care community is part of a plan, retirees may want to visit centers, get to know the residents, be added to waiting lists, and make required down payments to reserve a space. (Many communities require potential residents to be healthy at the time they reserve their space, so retirees will want to consider that in their planning.)

For both medical and long-term care options, investors should update their documents to reflect their preferences and directives. Financial and insurance solutions should also be implemented to account for future costs.

“Preparing for different types of care in retirement requires a holistic approach. Investors and their advisors must consider both the emotional and financial aspects of informal and formal care, choose the right coverages, and integrate these costs into their retirement budget,” Weber says. “By taking these steps, investors can ensure they have the resources and support needed to maintain their quality of life and financial security.”