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

The time to plan for your health care in retirement is years before you actually retire.

A woman pulls money out of a red wallet.
(Image credit: Getty Images)

Over the past few months, 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 just 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 health care.

While inflation may result in higher prescription and medical supply prices in the short term, health care 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 health care costs in their broader financial plan.

Estimate costs

According to a model Vanguard developed with Mercer Health, even with Medicare, average health care costs can reach over $5,000 per year. In my work with clients, I typically focus on health care 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 health care costs.

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A few years before retirement, start thinking about retirement timeline logistics. For example, if an individual is planning to retire at 62 but won’t be eligible for Medicare until 65, they’ll need to determine how they’ll cover health expenses for three years. For some, they might consider joining their partner’s health insurance plan (if the partner is not retiring at the same time), going with 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 health care expenses before Medicare coverage kicks in.

Next, map out anticipated expenses early on and develop a corresponding savings plan to meet future objectives. Medicare.gov provides helpful information on eligibility and premium estimates. Vanguard also provides Personal Advisor Services clients, for example, with a Health Care Cost Estimator that forecasts health care and long-term care expenses.

Evaluate family history

Of equal importance to timeline logistics is health considerations, such as family medical history, longevity expectations, and current health status, as those factors could influence your Medicare coverage choice. Of course, the concept of planning for a potential health scenario can be emotional. However, a forward-looking approach, and one that is guided with a financial adviser, 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. The leading conditions that often spur the need for long-term care include dementia, stroke, Parkinson’s disease and osteoarthritis. Assess family history well before retirement and determine whether long-term care may be an expense worth accounting for.

The need for long-term care can be a financial “wild card” since some clients may not require it in their lifetime. I work with clients to think through hypothetical situations as it can determine proper health care objectives tied to a financial plan:

  • “Are you planning to relocate in retirement?” Some locations (such as the West Coast and Northeast) can have higher health care costs.
  • “Will someone care for you as you age?” If the answer is yes, that will offset costs. However, without a spouse or child’s support, it likely means the need for outside resources, which can be costly.
  • Where will I feel most comfortable as I age?” That could be the difference between in-home nursing, a shared room at a nursing home or private resources at a more expensive facility.

Remember financial ‘trade-offs’

In addition to assessing family history and calculating potential future health care costs, it’s 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 seasons of life.

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


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Julie Virta, CFP®, CFA, CTFA
Senior Financial Adviser, Vanguard

Julie Virta, CFP®, CFA, CTFA is a senior financial adviser with Vanguard Personal Advisor Services. She specializes in creating customized investment and financial planning solutions for her clients and is particularly well-versed on comprehensive wealth management and legacy planning for multi-generational families. A Boston College graduate, Virta has over 25 years of industry experience and is a member of the CFA Society of Philadelphia and Boston College Alumni Association.