Over the past year, Americans’ concern over inflation has steadily increased. A Gallup poll coordinated in March noted that 17% of Americans believe the high cost of living and inflation is a significant problem, up from 8% in January. For individuals who may be nearing retirement, there are planning considerations to be mindful of as prices continue to rise – most notable, given the significant cost to retirees, is healthcare.1
While inflation may result in higher prescription and medical supply prices in the short term, healthcare costs typically outpace inflation over the long term, regardless of market conditions. This means soon-to-be retirees need to be forward-thinking and include healthcare costs in their broader financial plan.
According to a model Vanguard developed with Mercer Health, even with Medicare, average healthcare costs can reach over $5,000 per year.2 It is strongly recommended to focus on healthcare planning when an individual or couple is five to 10 years outside of expected retirement. This advanced planning can enable someone to develop a thoughtful approach to preparing for – and ultimately paying for future healthcare costs.
A few years before retirement, start thinking about retirement timeline logistics. If you are planning to retire at 62 but won’t be eligible for Medicare until 65, you’ll need to determine how you’ll cover health expenses for three years. You may consider joining your partner’s health insurance plan, going on COBRA, or finding a short-term insurance plan to cover the gap. Otherwise, it might mean tapping liquid assets or an HSA to pay for healthcare expenses. Next, map out anticipated expenses early on and develop a corresponding savings plan to meet future objectives.
Evaluate family history
Equally important to timeline logistics are health considerations, such as family medical history, longevity expectations, and current health status – as those factors could influence your Medicare coverage. Of course, the concept of planning for a potential health scenario can be emotional. However, a forward-looking approach, and one that is guided by a financial advisor, can limit the need to make abrupt and challenging decisions amid a health crisis. An additional possible expense, not covered by Medicare, is the need for long-term care. Assess family history well before retirement and determine whether long-term care may be an expense worth accounting for.
In addition to assessing family history and calculating potential future healthcare costs, it is important to understand the financial trade-offs that will come into play throughout different decades. For example, many retirees in their 60s see a portion of their retirement income funding travel or newfound hobbies. As retirees age and this activity decreases, there is a natural trade-off in expenses – the money that was once funding a golf habit may now be allocated toward prescription costs. This financial give-and-take is important to keep in mind, as retirement income will naturally fluctuate through different stages of life.
Healthcare is just one piece of the retirement puzzle. And, as prices continue to rise in this space, it is critical to develop plans years before retirement to help ensure long-term financial security.