Retirement ready: 6 steps to prep for health care needs

New Vanguard research, Six steps to creating a health-aware retirement plan, lays out a framework to help investors and their financial planners navigate retirement health care priorities. Retirees and those who care for them need a plan to prepare for the changing needs brought on by advanced aging—failing health, physical frailty, and cognitive decline—as well as the related costs.

As part of their research, Weber and his coauthors created a health care planning-needs assessment. This checklist includes questions that planners can use to guide clients through essential health care planning decisions. These decisions are important for everyone, regardless of financial condition, health, or marital status. The checklist covers topics such as support systems, care preferences, necessary documents and authorizations, decision-making processes, and financial considerations.

“If you’re going to live a long time, there’s a good chance you’ll face some health vulnerabilities,” Weber said. “If you do, it’s important to consider your options—your support network, financial resources, and care preferences.”

At age 65 and beyond, most investors will need to choose Medicare coverage. The options can feel overwhelming, but for most people, the choice will be between a Medicare Advantage plan—which tends to be cheaper, albeit with network restrictions—and Original Medicare plus a separate Part D prescription drug plan and a Medigap supplement (Plan G is a common one). Original Medicare with a supplement tends to offer more flexibility but could be more expensive over the course of retirement. For more about Medicare options, refer to the full research paper.

Health care costs in retirement vary from person to person based on several factors. They include:

• Health. People with chronic conditions typically need more care, which elevates costs.
• Location. Medicare supplement premiums and Medicare Advantage provisions vary from state to state.
• Premium surcharges and credits. Before Medicare, premium costs may be reduced by tax credits, while Medicare premium subsidies may be subject to surcharges for higher-income retirees.

Vanguard has partnered with Mercer Health & Benefits to develop a proprietary health care model that forecasts the range of costs for pre-retirees and retirees.¹ For a typical 65-year-old woman, the model predicts an annual health care expense of about $6,000 in 2025 if she purchases Original Medicare plus Medicare Supplement Plan G and a standard Part D prescription drug plan.

Less easy to estimate are potential long-term care (LTC) costs. Just over half of retirees can expect to incur no costs for LTC, either because they won’t need such care or because they’ll have unpaid care from family, friends, and neighbors. The remaining half of retirees will require some form of paid LTC, which could be either temporary and episodic or ongoing, potentially lasting for years. The uncertainty retirees have about potential LTC needs—10% of people turning 65 between 2021 and 2025 will require at least two years of LTC, and 4% will need five years or more—fuels the worries of retirement savers.

Paying for traditional medical costs can seem like a challenge, because we know they’ll increase over time because of cost inflation and the growing use of medical services as we age. In fact, projected average costs for a typical woman turning 65 in 2025 are likely to nearly double in real dollars by age 85.

However, this increase is balanced by the fact that as we age, people tend to spend less on pretty much everything else—from transportation to housing to entertainment. This reduction in spending can help many retirees offset the increase in health care costs.

“For most people, their cost curve will go down as they age, unless they encounter a big long-term care expense,” Weber said. “So then, the question is: Do you have an income plan in place that can support your needs throughout your lifetime, including a potential expense spike if long-term care is required?”

Incorporating potential costs into the planning process can be reassuring, particularly when the results show that investors are likely to be able to handle the costs they will encounter. On the other hand, such planning may reveal potential gaps in an investor’s financial ability to manage adverse health outcomes.

The research outlines several tools that can help make health care costs—LTC costs in particular—more manageable. Investors may want to work with their advisors to assess the pros and cons of various strategies, such as:

• LTC coverage.
• Income annuity options.
• Health savings accounts.
• Converting home equity into income.
• Investment strategies.
• Residence in a continuing care retirement community.

For a plan to be effective, it must be executed properly. That might include working with professionals to prepare or update key documents, discussing care wishes with loved ones, or getting one’s financial situation in order. The research provides a checklist of actions that investors may want to work through with their financial planners. This includes regular check-ins to make sure that decisions remain appropriate as life circumstances shift over time.

“People should get their ducks in a row now. If they wait until they need these things, it may be too late,” Weber said. “Working through these steps is essentially preparing to live the retirement they’ve envisioned for themselves.”

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• Young workers benefit from retirement plan improvements (article, issued July 2024)