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      Planning for Health Care Costs in Retirement

      Vanguard Research – June 2018

      Mercer Health and Benefits: Derek Guyton, FSA, MAAA, FCA; Jennifer Leming, FSA, MAAA
      Vanguard: Stephen M. Weber, CFP®; Jacklin Youssef, CFP®, MST; Jean A. Young, CPA, MST

      Vanguard engaged Mercer Health and Benefits to develop a new model to forecast health care costs for U.S. retirees. Vanguard believes that retirement planning frameworks should be adapted as follows:

      ■ Planning for annual health care insurance premiums and out-of-pocket expenses at retirement should be distinct from planning for long-term care expenses.

      ■ Some research on health care costs in retirement estimates these expenses as a lifetime lump sum. We believe that a better planning framework considers these costs as annual expenses personalized to an individual’s health status, coverage choices, retirement age, and loss of any employer subsidies. For a typical 65-year-old woman, the Mercer-Vanguard model predicts an annual healthcare expense of $5,200 in 2018.

      ■ During their working years, some individuals should save at higher rates to account for potential future incremental health care spending. Workers with generous employer health care benefits that may not be offered in retirement and those at higher risk of chronic conditions because of their family history or current health status should target higher replacement ratios.

      ■ Long-term care costs represent a separate planning challenge given the wide distribution of potential outcomes. Half of the individuals will incur no long-term care costs-but there is a small but meaningful risk that costly care will be required for multiple years.

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