When it comes time to ask yourself, “Can I retire?,” you need to understand what your future expenses are going to look like, and health care costs are a big part of this equation. Stephen Weber, CFP®, of Vanguard Investment Strategy Group conducted research on health care costs in retirement and shares some of his findings.

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Talli Sperry: I’m going to ask this question that Jack is asking, and I think it’s probably what everyone is thinking right now. He’s saying, “I’m five or six years from retirement. Isn’t it best to just continue to save like heck right now and to not think about what my actual retirement budget for health care will be?” So Steve, I might send that one to you.

Steve Weber: Well that’s a good way to think about it. But there’s going to be a point where you say, “Can I retire?” Right? And when you ask that question, you need to be able to understand what your expenses are going to look like on the other side.

For many people, a big question in that is the issue of health care costs. In general, I think a lot of people tend to assume that what they spend is what they’re going to continue to spend on most categories. But they know that health care is sort of this different thing, and we know that we worry about health care costs for a number of reasons. We worry about them because they grow. We worry about them because we know that 65-year-olds use more health care than 55-year-olds, and 75-year-olds use more than 65-year-olds.

My parents are in their late 70s, and they each have a big handful of pills. And I’m 50, and I don’t have a handful of pills yet, but I know that my handful of pills is coming. When that happens, it’s going to be more expensive, so that makes costs go up. The other thing is that costs traditionally grow faster than inflation, so that makes us worry. That was kind of the initial question that we’d had in the survey or that second question where a lot of people were worried about the growth.

Now the good news is when we did our research, one of the things that we found is the growth isn’t really a thing that we worry about that much. And the reason why is that although your health care costs are going to go up as you go through retirement, all of your other expenses tend to go down. And even if you think about these worst-case health care scenarios, if you have multiple chronic conditions and you have very high health care costs, you’re probably not taking as many vacations, for example, or you might not be driving as much, so your transportation costs will tend to go down.

And this is shown both in data and also when we think about it anecdotally in our own lives, about how we spend as we go through life. We worry about health care because we see that bill going up and up and up, but we don’t really think about the ones that are going down at the same time.

When we make the assumption today that your expenses overall are going to go up with inflation as you go through retirement, we’re actually already making a very conservative assumption because, in general, study after study has shown that our expenses do tend to trail off in real dollar terms as we go through life. And that really has nothing to do with how much money we have or any of these other things. It just tends to be how our patterns of spending seem to work. They actually kind of peak up in the 50s, and then they start dropping off, even as we’re heading toward retirement.

So yes, save, save, save, save, save.

Important information

For more information on the topic of health care costs in retirement, reference Planning for Health Care Costs in Retirement, a research paper authored by Vanguard and Mercer Health and Benefits.

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