Framing health care costs in retirement as an annual expense rather than a lifetime lump sum can help investors better understand total annual expenditures and plan accordingly during their retirement years, according to new research from Vanguard.
Developed with the consulting firm Mercer and explained in a comprehensive research paper, "Planning for Health-care Costs in Retirement," Vanguard said the new framework outlines key health care cost factors and personal considerations.
"Most analyses available today point to a daunting out-of-pocket health-care expense over the lifetime of a retiree," said Jean Young, co-author and senior research associate in the Vanguard Center for Investor Research. "These large dollar values can be demotivating for investors from a psychological and behavioral perspective. 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."
Vanguard said that one of the most important inputs in understanding potential costs is the volume of health care services a person may consume in retirement, which can be estimated based on pre-existing chronic conditions and family health history. Another significant influencer of out-of-pocket health care costs is the type of Medicare coverage that a retiree selects, and whether their income dictates additional surcharges.
Long-term care costs represent a separate planning challenge given the wide distribution of potential outcomes.
Vanguard said that half of individuals will incur no long-term care costs, but 15% could incur expenses exceeding $250,000. Even if the probability is low, Vanguard said it encourages retirees to consider the possibility of an extended, expensive long-term care stay, given the magnitude of the potential cost.