Rising Health Care Costs and the Impact on Soon-to-Be Retirees

 Rising Health Care Costs and the Impact on Soon-to-Be Retirees


Over the past few months, Americans ’concerns about inflation have continued to rise. A Gallup poll coordinated in March found that 17% of Americans believe the high cost of living and inflation are a significant problem, up from just 8% in January. For individuals about to retire, there are plans to keep in mind as prices continue to rise – the most recognizable, given the significant cost to retirees, is health care.

While inflation may result in higher prices of prescription and medical supplies in the short term, the cost of health care is generally higher than inflation in the long term, regardless of market conditions. This means future retirees need to think ahead and include health care costs in their broader financial plan.

Estimating costs

According to a Vanguard model developed in partnership with Mercer Health, even with Medicare, the average cost of health care can reach $ 5,000 per year. In my work with clients, I usually focus on health care planning when an individual or couple is five to 10 years out of expected retirement. This advanced planning enables a person to come up with a thoughtful approach to preparing for-and ultimately paying for the future cost of health care.

A few years before retirement, start thinking about the logistics of the retirement timeline. For example, if an individual plans to retire at 62 but does not qualify for Medicare until 65, they need to know how they can cover health costs over three years. For others, they may consider joining their partner’s health insurance plan (if the partner does not retire at the same time), joining COBRA or finding a short-term insurance plan to cover the gap. Otherwise, it could mean tapping into liquid assets or an HSA to pay for health care costs before Medicare coverage begins.

Next, map out expected expenses in advance and create a corresponding savings plan to achieve future goals. Medicare.gov provides helpful eligibility information and premium estimates. Vanguard also provides clients with Personal Advisor Services, for example, a Health Care Cost Estimator that predicts health care and long-term care costs.

Weigh the family history

Of equal importance to timeline logistics are health considerations, such as family medical history, longevity expectations, and current health status, as those factors can influence your choice of Medicare coverage. Of course, the concept of planning for a potential health scenario can be emotional. However, a forward-looking approach, and one guided by a financial advisor, can limit the need to make sudden and challenging decisions in the midst of a health crisis.

An additional possible cost – not covered by Medicare – is the need for long -term care. The main conditions that often drive the need for long-term care include dementia, stroke, Parkinson’s disease and osteoarthritis. Examine family history carefully before retirement and determine if long-term care can be an expense worth counting.

The need for long-term care can be a financial “wild card” because some clients may not need it for the rest of their lives. I work with clients to think through hypothetical scenarios because they can determine the right health care goals tied to a financial plan:

  • “Are you planning to move into retirement?” Other locations (such as the West Coast and Northeast) may have higher health care costs.
  • “Will someone take care of you your age?” If the answer is yes, that will offset the costs. However, without the support of a spouse or child, this likely means the need for outside resources, which can be expensive.
  • Where do I feel most comfortable in my old age? ” That could be the difference between in-home nursing, a shared room in a nursing home or private resources in a more expensive facility.

Remember the financial ‘trade-off’

In addition to assessing family history and calculating the potential cost of future health care, it is important to understand the financial trade-offs that will occur over different decades. For example, many retirees over the age of 60 see a portion of their retirement income funded by travel or newly discovered hobbies. As retirees age and this activity decreases, there is a natural shift in costs – the money that once funded a golf practice can now be spent on prescription costs. This financial give-and-take is important to keep in mind, because retirement income will naturally fluctuate at different times in life.

Health care is just one piece of the retirement planning puzzle. And, as prices continue to rise in this gap, it’s important to make plans years before retirement to ensure long -term financial security.

Senior Financial Adviser, Vanguard

Julie Virta, CFP®, CFA, CTFA is senior financial adviser at Vanguard Personal Advisor Services. He specializes in creating customized investment and financial planning solutions for his clients and is particularly knowledgeable in comprehensive wealth management and estate planning for multi-generational families. A graduate of Boston College, Virta has more than 25 years of industry experience and is a member of the CFA Society of Philadelphia and Boston College Alumni Association.





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