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Planning for the cost of health care in retirement might be easier than you think. Let’s take a look at what you should consider as you get started.
How much is health care going to cost?
Many of today's almost-retirees feel confident about their futures. But if there's one thing that worries them, it's the cost of health care.1
And no wonder! There are a lot of big, scary numbers being thrown around out there. And let's be honest. If you add up your spending over 30 years for things like food, gas, and vacations, it's going to seem like a lot.
That’s why it’s important to plan for health care costs. If you're like most people, an employer has been subsidizing your insurance costs all your working life, so you may be paying more yourself once you retire. But never fear. Most years, your health care costs will be a relatively stable piece of your retirement-spending pie—making them easy to plan for.
How will your health care spending change over time?
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. For one, 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.2 This increase takes into account the fact that most people simply spend more money on health care as they get older. On the other hand, expenses for things like entertainment and travel tend to drop over time. In fact, most people spend less overall the further they get into retirement.
What affects health care costs for retirees?
Your health care costs in retirement will depend on several factors. The good news is that you have some control over most of those factors.
Here are the 6 biggest factors, according to our research, along with some suggestions for managing them.2
Factor 1: Your health status
It's no surprise that the worse your health or your immediate family's health history is when you enter retirement, the more you can expect to spend.
4 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?
- Is there a history of chronic health conditions in your immediate family?
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.
Factor 2: Your location
There's a big difference in price tags between the most and least expensive locations for health care costs. 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, Plan F, were twice as high in the highest-cost area ($3,498) as they were in the lowest-cost area ($1,639) in 2022.
Factor 3: Your age when you retire
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 you are included in their 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 you were still working, but your employer won't subsidize it anymore, so your costs will increase.
If you're 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 insurance 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.
Factor 4: Your coverage choices
You'll need to make a number of decisions about your Medicare coverage.
- When it's time to enroll in Medicare, you'll decide between Traditional Medicare or Medicare Advantage. If you select Traditional Medicare, you might want to add Medigap coverage—and there are many plans to choose from. Either way, you'll also need to decide if you want prescription coverage as well.
- 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 want to consider additional long-term care coverage, since Medicare doesn't cover those costs. Unlike other health care costs, there's an enormous variance in potential long-term care costs, from nothing to hundreds of thousands of dollars.
When considering your options, think about whether you'd prefer to pay higher premiums (or additional premiums for extra policies) to increase the predictability of your out-of-pocket costs.
WANT TO CHANGE YOUR MIND?
Factor 5: Your income
Factor 6: Your employer’s subsidies
If your employer has been carrying some of the weight of your health care costs, the loss of those subsidies can make your health insurance costs much higher in retirement.
On average, our research shows that a 65-year-old woman will lose more than $5,000 a year in employer subsidies at retirement.2
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, go to medicare.gov.
Where should you save for health care expenses
If you're covered by a high-deductible health plan at work, a health savings account (HSA) is a flexible and tax-efficient way to save for retirement and cover your medical costs—today and in the future.
Contributions are pre-tax (both federal and state) and withdrawals for qualified medical expenses, including Medicare deductibles and premiums, are tax-free.3
Want to take a deeper dive?
Whenever you invest, there’s a chance you could lose the money.
1Source: Employee Benefit Research Institute, 2020. 2020 Retirement Confidence Survey Summary Report.
2Source: Vanguard and Mercer Health & Benefits, June 2021. Planning for health care costs in retirement.
3Taxes: You can only use your HSA for medical costs that are covered. Otherwise, you may have to pay income tax on the money you take out. And if you’re under age 65, you may also face a 20% federal penalty tax.
We recommend that you consult a tax or financial advisor about your individual situation.