Valley Forge, Pa.-based Vanguard, in partnership with Mercer Health and Benefits, has developed a new model to help estimate health-care costs for retirees.
First and foremost, clients need to understand the potential annual costs of health care in retirement rather than fretting over a large average lump sum, according to “Planning for Healthcare Costs in Retirement,” a research paper released on Tuesday to detail the new model.
“Most analyses available in the marketplace today point to a daunting out-of-pocket health-care expense over the lifetime of a retiree. These large dollar values can be demotivating for investors from a psychological and behavioral perspective,” Jean Young, co-author and senior research associate in the Vanguard Center for Investor Research, said in a released comment. “Instead, our model focuses on the more manageable task of planning for incremental, annual health-care costs, while separately considering and integrating the potential for long-term care expenses.”
To some extent, the eventual cost of health-care services in retirement can be estimated based on a person’s health history, particularly when it comes to chronic health conditions. For example, Vanguard says, a 65-year old woman on traditional Medicare with “low risk” health status will incur a median of $3,400 of annual health expenses in retirement – but a similar woman with “high risk” health status will incur $7,600 in annual health expenses, twice as much.
Vanguard says that coverage choices should be based on the client’s health, retirement age and income.
Another variable in estimating retirement health-care costs is the type of Medicare coverage a retiree selects and whether their income will cause them to incur additional surcharges for coverage. While traditional Medicare may present a lower-cost option for clients with a low- or medium-risk health status, Medicare supplements may lower out-of-pocket expenses for clients with high-risk status.
Retirees should be encouraged to weigh and review their Medicare enrollment options not just when enrolling in the program, but annually thereafter so that they may adjust their coverage level depending on their needs.
Early retirees leaving the workforce before the age of Medicare eligibility, currently 65, will have to plan to fund personal insurance during the gap between their workplace coverage and Medicare.
Vanguard says that clients should understand the impact that employer subsidies have on the cost of their health coverage -- the out-of-pocket cost for insurance premiums can increase drastically if someone separates from employment before they are eligible for Medicare. The out-of-pocket cost of insurance coverage skyrockets for high-risk clients who drop their employer sponsored coverage before becoming Medicare eligible.
To cover the loss of employer subsidies, future retirees may want to save at higher rates, says Vanguard. Health savings accounts present a tax efficient vehicle in which to save for planned retirement health care expenses.