Other highlights from this webcast
- How can Vanguard help me determine my future health care expenses?
- How do I know if I’ve saved enough toward my future health care costs?
- How should I plan for transitioning from employer health care to Medicare?
Talli Sperry: Good evening, I’m Talli Sperry, and welcome to tonight’s live webcast focused on planning for health care costs in retirement. Planning for future health care expenses can be daunting in this day and age of rising health care costs and ever-changing insurance plans. It’s difficult to know how much savings will be enough. This interactive webcast is tailored specifically to Personal Advisor Services clients like you. We’re glad you’ve joined us for this important conversation, and we’re here tonight to simplify the health care topic and discuss strategies for saving for future expenses.
Our experts here at Vanguard have conducted a lot of in-depth research and analysis on health care costs in retirement, and they’re here to share their insights. We’ll discuss how life scenarios, such as long-term care and paying for a loved one, may impact your investment strategy, and there’s a lot to cover. We’ve seen from your presubmitted questions that our audience is highly engaged with these topics, so we’d like to thank those of you who submitted questions in advance. And we want to encourage all of you to keep sending in questions as you’re watching. These conversations are designed to connect with the Vanguard community of investors, so we definitely want to hear from you. We’ll get to as many of your questions as we can.
Now before we dive in, if you need to access technical help, it’s available by selecting the blue widget, and that one is on your left. You can learn more about Vanguard’s services by clicking on the green Resource List, and that’s on the far right of the player. There you can access technical information and research on tonight’s topic. With that said, let’s turn to our guests.
We have three really terrific and knowledgeable guests here tonight. Jacklin Youssef, who is a senior wealth planner here at Vanguard. She provides comprehensive wealth and financial planning guidance to Personal Advisor Services clients, as well as financial planning education to financial advisors.
Also with us is Kevin Miller, a Certified Financial Planner™ professional with Vanguard Personal Advisor Services®. Kevin provides Vanguard clients like you with investment support and personalized service.
And we have with us Steve Weber of Vanguard U.S. Wealth Planning Research Group, which specializes in topics related to retirement and investor behavior. Welcome, and thank you guys so much for being here tonight.
All: Thank you.
Talli Sperry: Our topic tonight, planning for health care costs in retirement, is a hot-button issue. And Steve, you and Jackie have conducted a lot of research on this topic, and you’ve even written a very informative white paper. I want to let our audience know you can access that through the Resource List widget that we talked about just a moment ago.
But before we begin, Steve, can you give us some of your insights on some of the research that you found?
Steve Weber: Sure. A number of years ago—probably two, maybe three years ago—Jackie and I started working on this with some other people. We started to realize we were giving advice on things like Social Security claiming and some of these other things, but we didn’t really touch the health care topic very much. It often seemed like it was something outside of the financial space a little bit for us and more of a different topic.
But we were starting to realize that retirement isn’t really just a wealth question. It’s a “health and wealth” question. In fact, we have a slide that shows one survey on the five biggest fears.
That slide shows us that the health care costs concern is really one of these top five concerns. This was a survey that was done across retirement plan participants, 401(k) investors, and you’ll notice that two of the top three topics are related to health care costs. When we talk about the third one there, health care costs, and specifically when we look at baby boomers, it was their top concern. So if we weren’t addressing the health care topic, we weren’t really addressing all of the things that we needed to address in order to speak to clients.
And when you looked at what was out in the world at that time, most of the things that you would see if you asked about health care costs in retirement gave sort of, what we started to call, big scary numbers about how much it was going to cost to pay for health care in retirement.
What we quickly learned is that phrasing these things in that kind of lump sum wasn’t very helpful because health care costs are really a budgetary item for most people as they go through retirement. It’s more like your food bill than it is like buying a house. So a big lump-sum number about how much it’s going to cost for all of your health care in retirement makes about as much sense as a big lump-sum number of how much all your food is going to cost during retirement.
So we learned to think about it more as an annual expense, and we came out with numbers that are a little less scary when you put it into that context. Now, it varies a lot from person to person, and these are the conversations that we need to have with people. But we found that for a typical, single 65-year-old woman, they might expect their Medicare costs, as they go through life, to be about $5,200–$5,300 a year, which is maybe more than what you’re paying right now before you retire, but it’s a budgetable item. So we saw less reason for people to be scared about that type of thing.
Now the flip side of that potentially is long-term care costs, which maybe Jackie can address a little.
Jacklin Youssef: Sure. And long-term care is clearly the other area that concerns a lot of our clients the most, because each one of us, even around this table, actually has a personal story of a family member or an acquaintance who encountered long-term care.
We recognize that that clearly was a big concern for our clients. But what we found is, and there’s a chart on the screen that clearly highlights the fact, that those are unpredictable by nature. So these figures can actually be extremely large, or they can actually be as low as zero. We recognize that about 50% of retirees can expect to have no paid long-term care expenses. Another 25% of retirees can actually expect to pay up to $100,000. I think the dilemma is that there’s a small percentage, 15% of retirees, who can actually anticipate to pay in excess of over $250,000. So it’s the fact that there is a low probability of actually paying a large amount that concerns clients.
So once we recognize that these are the possibilities of how much it may cost, we started looking into how we can continue to help clients prepare and plan for that possibility.
Talli Sperry: That makes sense. And Kevin, as a personal advisor, you work directly with our clients, and I’m sure you hear questions around this topic. What concerns do they voice to you?
Kevin Miller: Absolutely. The two things that I really hear from clients is that they always want to know basically how they compare to other people. If they’re budgeting numbers, are they using a number that’s realistic compared to people close to where they live? And then they always want to know what Vanguard’s thought on the topic happens to be, and we’re in a really good position now where we can answer both of those questions for them.
Talli Sperry: That’s exciting, and I think that will help all of us here tonight, so that’s wonderful. Thank you all.
So those of you who are webcast regulars, you know that we like to start things off with a poll question for our audience. Tonight, since we’re talking about planning for health care costs in retirement, we’d like to ask for your thoughts. On your screen now, you’ll see our poll question which reads, “What concerns you most about health care planning?” And your responses are: “long-term care,” “the gap between employer benefits ending and Medicare beginning,” and “rising costs.” And I see many of you answering now. If you can keep that up, we’ll get back to it in just a few minutes and share your results.
But while we’re waiting, let’s jump to our first presubmitted question. Steve, I’m going to throw this one to you. This comes from Brad in Cazadero, California, who says, “No specific question. I just need to know how to determine how much I need to save for health care costs. Thanks.” And I think we are probably all in Brad’s situation, so what would you tell us, Steve?
Steve Weber: Well, it is the big question, and it’s where we started, as I was saying before. Everybody said, “What’s the number, what’s the number, what’s Vanguard’s number? Everybody has a number, but does Vanguard have a number?”
And the answer we came out with is, no, we don’t really have a number for health care costs specifically, other than helping you figure out your annual costs. That’s really the one that you want to get your arms around so that you can budget for it appropriately.
The difference on that is that retirement is covering all of your basic expenses as you go through life, not just health care. So the number that we need to work on over time is really: What are you going to spend during retirement on all of your things, including health care?
The difference with health care is—I compared it to food earlier, but your food bill the day before you retire and the day after you retire is likely to be pretty similar, whereas your health care bill is going to change. And, in general, we don’t really have a very good understanding of how it’s going to change. So that’s the kind of conversation we need to have with people so that we can help them understand what they might be seeing on the other side.
Talli Sperry: That’s great. I think that’s helpful to level set us there as well and give perspective. So when I look at our poll results, it looks like about 40% of our audience is concerned about long-term care, 23% is concerned about that gap between benefits ending and Medicare beginning, and 35% is concerned with rising costs. So we’ve got an equally concerned audience here tonight. Any surprises from your research?
Jacklin Youssef: No, not at all. I think it’s actually in the right priority list that I would have anticipated.
Talli Sperry: Okay, that’s great to know, so we are on track with our concerns.
All right, so we’d like to ask you another question to continue to get to know you as an audience. And I would encourage you to please submit questions throughout the webcast. This second poll question is, “How concerned are you about your ability to fund health care costs in retirement?” So either “very concerned,” “somewhat concerned,” or “not concerned at all.”
And in the meantime, let’s take another presubmitted question. Jackie, this one is for you, and it’s from Robin from Gainesville, Georgia, who asks, “At 70, without long-term care insurance so far, what’s the wisest approach to planning for a long-term care cost?” I think this is on all of our minds.
Jacklin Youssef: Yes, exactly. Great question. So Robin, before I start talking about how to fund the long-term care event, if it arises, you’d want to actually understand a number of different things. You’d want to look into your own personal situation. Understand whether you have access to what we call “informal care providers,” that would be a spouse, adult children, other family members that certainly can step in that position of actually providing informal care services. Statistics show that there’s a significant number of individuals that are offering informal services to elder parents or even spouses and so forth. It’s estimated that one in five adult individuals actually are offering informal care services.
So understanding if you have access to this, if you have individuals who are capable and willing. The bottom line is: Are they willing to step into that role, as well as understand, personally, would you be content with certain types of service providers or services? Looking at what type of service providers would fit into your own specific plan, because not all service providers are skilled nursing home facilities. So you could essentially start with independently living for a period of time, maybe having a home care service provider for a period of time, before maybe hiring a home health aide, before maybe looking into a number of other services, before ultimately transitioning into a nursing home.
So once you have a good grasp as to what fits your own specific situation, then I think the next logical area is thinking about how to consider funding for that type of need. And that’s where I would always suggest that you’d want to explicitly plan for covering this using your financial assets.
First and foremost, understand what’s available to you within your portfolio, how you can cover this. And recognize that there are a number of other solutions that could be available to you, whether it’s using equity from your home or even some type of hybrid insurance coverages. But there are a number of different options that you can think about with the assistance of your own financial advisor, of course.
Talli Sperry: That’s helpful, Jackie. I really appreciated the research, which all of you have access to through the Resource List widget if you want to review Jackie’s lists, like I went through many times. And it’s helpful to start to parallel your own life scenario with some of the things you asked us to think through. So thank you, great.
Let’s get to your results now. It looks like about 20% are very concerned and 74% are somewhat concerned, so you guys seem to be good planners. And about 7% are not concerned at all. Is this consistent?
Jacklin Youssef: Those are pretty good results.
Kevin Miller: Yes, I would say so.
Talli Sperry: Okay, great to know. So let’s dive into some more of our presubmitted questions. Kevin, I’m going to throw one to you. And this is from Robin from Honey Brook, Pennsylvania, who asks, “How can a Vanguard advisor help out?” So Kevin, what do you do for our clients?
Kevin Miller: Absolutely. So everything that we’re talking about tonight, it’s something that’s specific to clients that are in Personal Advisor Services exclusively. And the tool that Vanguard has developed is really designed for people that are fairly close to retirement or in retirement. Through the modeling that we utilize, what we can do is account for these costs, whether they’re part of their basic living expenses where they’re lumped in with everything else, but we know that they’re in there. Or sometimes we’ll specifically break them out so the client can see that over and above your basic expenses, we’ve accounted for health care costs. And then just like every other expense that they have, we can look at them and run different scenarios. We run 10,000 scenarios that will look at the likelihood of running out of money typically before age 100. And if we add in these expenses, how are they doing versus the goal?
That’s really the essence of what we do from a planning standpoint. So we can really take a look at these annual expenses, whether it’s for someone that’s in the preretiree phase and maybe pre-Medicare, then figuring one expense for a number of years until they get the Medicare, and then it switches, and now it’s a different cost from 65 and beyond. And we can model that pretty easily and see how this changes your financial situation.
In a lot of cases, the clients that I deal with, they’re in pretty good shape. But other times, you know, they have to make some decisions—and tradeoffs if they have limited resources—about where to spend their assets. So we can really help look at, given the expenses that they have, what type of financial shape they are in.
Talli Sperry: I think that’s helpful. For those of you who have interest in our Personal Advisor Services, or want to know a little bit more of what you get through the service, I want to direct you to the link in the Resource List. That details a little bit more of what Kevin was talking about and the breadth of services you get through Personal Advisor.
So Kevin, I want to go a little bit deeper and ask you a question from Peter who’s from Collierville, Tennessee. And he’s asking, “What are the best estimation tools that Vanguard has to determine future health care expenses?”
Kevin Miller: Absolutely. So Vanguard has created a health care cost estimator tool. It actually is really neat the way it works in that we try to classify a client based on their anticipated health care costs—if they’re in sort of a low, a medium, or a high-risk health situation. And you can either tell us where you think you fall in one of those categories or it’ll walk you through based on your health history and some broad categories that you may fall into, as well as your family’s history. And then we’ll say, “Okay, you probably fall into this category.” We can even look at the part of the country that you live in because not all expenses are equal, depending on where you live. And it’ll give some ranges for someone that lives where you live. If you’re in a low-risk category, here’s a range and here’s a median number.
One thing I always try to stress with clients is that it’s really a starting point because sometimes if a client hasn’t really looked at this at all, they may not have any sort of frame of reference. So this is, on average, what you could expect. Sometimes I’ll talk to clients and the number is high or low, and we can always adjust accordingly. So we’re not fixed to that number or tied to it necessarily. And then, again, we would incorporate that into an expense as far as their financial plan goes, and then look to see how that adjusts where they’re at long term.
Talli Sperry: It sounds like an incredibly personalized tool. I’m amazed at the layers you can go to to make sure it fits each of us. That’s really great to hear.
You know, Jackie, we’ve gotten a lot of questions about this transition that happens through health care expenses. So I’m going to ask a question from Mark who’s from Portland, Oregon: “How should we plan for this transition, moving from employer health care to Medicare?”
Jacklin Youssef: We found in our research that that is one of the factors that impacts your annual health care expenses. It’s how you ultimately will be transitioning from your working years (having employer-subsidized health care coverage) into retirement (potentially losing that employer subsidy). And depending, of course, on the level of the subsidy that the employer provided, that can clearly impact how much of an incremental increase you’re looking at actually covering.
Recognizing, of course, that that means you as an individual need to make sure you have a pretty good understanding of what your employer’s offering in terms of coverage, how much is the level of subsidy compared to other employers, and what type of coverage you’ll have when you’re retired. Whether that will be at 65, knowing that you’ll be looking into one of the Medicare options, and we’ll perhaps talk about this later. Or if you’re looking at even retiring before 65, then you need to find a way to bridge your coverage through Medicare, recognizing that your increase will probably be significantly higher, at least for that period of time.
So stopping to learn what you have and what you will have in the future will inform that part of the decision.
Steve Weber: Because it’s important to realize that you’re paying for health care before you retire and after you retire. Health care expenses don’t suddenly materialize for the first time at retirement. It’s just that a good portion of that cost before you retire for a lot of people is covered through an employer subsidy that’s kind of invisible to most of us.
We all know that we have these benefits and that they’re worth something, but we don’t really think about how much they’re worth. When we actually hit retirement, if you don’t also have retiree health care benefits, suddenly that amount that was invisible to you becomes visible very quickly.
Jacklin Youssef: That was actually a personal Aha! moment for me as we were going through the research ourselves.
Talli Sperry: Yes, I was thinking the same thing because this is a very normal thing. We just don’t experience it at the same level, so it’s helpful. Great.
Kevin, we’ve got a couple follow-up questions from the live feed for you. One is asking about the scenarios that are run. “So does Vanguard Personal Advisor take into account health care costs in the standard models, and does that run as a default?” That’s from John. And then we’ve got Renee asking where to find the health care tools. So maybe you could tackle those two together. Thank you for the live questions.
Kevin Miller: Yes, for the second part first, it’s something that for some clients the tool will actually show up in the Personal Advisor section when you log on to vanguard.com. I know for a limited number of clients, it’s there automatically and you can go through it. Some of my own clients have done it proactively. For the ones that it hasn’t shown up yet, as the advisor, we can push it out to the clients. It would show up as a message in their secure message center online. And then they would go through it. It usually takes a few minutes to go through. It’s not an hour-long process or anything like that.
In terms of the cost, the tool will personalize it based on where they live. Again, we’re trying to get a range for them and looking at sort of where they fall. And this is when I said we look at how they compare to others; you’re trying to put them into a category. But we can shift based on their preference, for instance, “This number feels a little low to me.” Or sometimes you’ll talk to clients—and I think a lot of Vanguard clients tend to be conservative by nature—and they say, “Okay, here’s a number, but let’s tack on a few extra thousand dollars just to be on the safe side,” so they know that there’s some additional cushion in there as well. And we can easily do that and stress-test things over time.
Kevin Miller: And I would also say, one thing that’s really neat is we can run these 10,000 scenarios. It takes us a few seconds. So if we want to look at multiple things, we can do that very quickly. It’s not like we have one shot at this and then we’re done forever. We can look at a bunch of different scenarios if they want to see how different things play out.
Talli Sperry: That’s great. It’s nice to know we’ll have options to be able to weigh. It gives us a little bit more control.
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. But when you get to the point where you really are asking “Here, I am. Am I ready?” then, you know, talk to Kevin.
Talli Sperry: I think that’s an encouraging message all around. I think we’re feeling we have choices in these scenarios, which is helpful.
We’re starting to get a lot of questions, presubmitted as well as live questions, around the point when you move to Medicare and Medicaid. So I’m going to take a presubmitted question and then a live one, both around these topics.
This one is from Sue from Alexandria, Virginia, who says, “I intend to keep working with my company health benefits when I turn 65. What do I need to do with respect to Medicaid or Medicare?” So Steve, I’m going to stay with you for a second longer.
Steve Weber: Sure, there are a number of things to keep in mind. Number one is that if you reach Medicare age and you’re still working, the first thing you probably want to do is check with your own benefits department because there may be policies around your own health care plan that you want to make sure that you’re dealing with correctly.
At the minimum, you probably need to make sure that you’re signed up for Medicare Part A. Some employers may also want you to sign up for Medicare Part B or some of these other kinds of things. The issue is that there’s this window at 65 where you need to make choices about Medicare. If you are still working and under employer plans, there’s some leeway around that. But it’s a good idea to check with your employer to make sure you understand the rules around your specific plan with regards to those types of things.
Talli Sperry: That’s great. And for those of you who are wondering a little bit more about what we mean by Part A, Part B, etc., you’ll see a great guide in your Resource List, and I believe that’s Medicare A to D. A super helpful piece.
Jackie, I’m going to draw this back a little bit to Doug Perkins, and he also sent in a question that’s got a similar vein, but I want to see if you could add anything to it. He’s saying, “I’m 64, and when I apply, should I be looking at original Medicare or Medicare Advantage?”
Jacklin Youssef: Great question. So maybe I’ll actually look into what the differences are. And great point about directing our viewers to the infographic that’s available.
Medicare and original Medicare really refer to two different parts. It refers to Parts A and B that Steve had alluded to. Part A really actually covers the inpatient service or the hospital insurance type of coverage. Part B generally covers outpatient services as well as doctor visits and so forth. So those in combination are what make up what we call “original Medicare.”
That’s essentially more of the traditional Medicare that a number of individuals have. But you start looking at this and you recognize, first of all, that Medicare doesn’t cover 100% of health care costs. It covers a large portion, but there are still a number of other costs. There’s a premium involved with Part B. There are deductibles. There is coinsurance. So there are a number of costs that certainly are out there, and that becomes one of the areas that you want to think about when you’re thinking about your annual health care costs.
For that reason, this is where we found that nine out of ten Medicare beneficiaries actually opt for a way to supplement their Medicare coverage. And you can certainly look into a number of different alternatives for supplement.
One of those alternatives is the Medicare Advantage, or Part C. Again, recognize the different letters that we’re talking about. Part C is coverage that’s actually offered by private insurance companies, but those insurance companies are actually approved by Medicare and are required to cover all the services that are covered by A and B. But they’re packaged and they can actually even offer some prescription drugs. They sometimes offer other services that are not even covered by original Medicare, such as dental, which is a big concern for a lot of retirees; vision; hearing aids; and so forth. So there are a number of different things that are available with Medicare Advantage that are not necessarily available within original Medicare.
You’d want to think about looking at the cost, how much does it cost you in premium as well as out of pocket? So the tradeoff really depends on what your health status is and how much you anticipate to pay upfront as well as on an ongoing basis out of pocket. But you’d also want to think about the fact that there are a number of other factors such as where you live. Do you continue to travel? Do you have a favorite doctor that is essentially within network? So there are a number of those considerations that you want to think about when you’re making that choice.
The one thing I want to leave you with is that Medicare Advantage tends to be a popular choice for a lot of retirees. About a third of our Medicare beneficiaries have Medicare Advantage, but you’d have to certainly make sure to recognize that costs vary significantly. You’d want to continue to shop around for those types of coverages, but this is clearly one of the areas that will actually require a lot of planning ahead of time to make sure that you’re getting the initial decision right. But recognize that there are some abilities to go back and review this again on a regular basis.
Steve Weber: Yes. I like to think that the choice isn’t that different than the choices we make when we’re working. The government makes it really confusing by putting all these letters and all these different things, but when you think about Medicare Advantage, most Medicare Advantage plans are kind of analogous to what you would think of if you enrolled in an HMO plan through your employer. So at the same time, it’s likely to be cheaper in a lot of different ways. On the other hand, you’re likely to be subject to certain network restrictions and configurations. So people that travel a lot or spend winter in a different state might not think that Medicare Advantage is their best choice because of the restrictions of networks and things like that, even though some aspects of it might be cheaper.
Whereas traditional Medicare is more like your traditional fee for service. Almost certainly if you’re doing that, you’ll also want to think about some sort of supplemental policy to go with it. But when you group those together, you might have a little more cost certainty but probably a little more expense from time to time. But you can go to any physician that accepts Medicare.
So those are some of the tradeoffs that people should think about.
Talli Sperry: Great. That’s good insight. Kevin, we’ve got a number of clients that are starting to ask us this question about these gap years. And David and Karen are asking to talk a little bit more about the gap years between retirement and Medicare. Specifically, David has a question around using HSAs during that time. Could you talk about that transition and maybe some experiences from clients that you’ve seen?
Kevin Miller: Sure. So an HSA is a “health savings account,” which is usually something that comes when you have a high-deductible health plan. A lot of times people think of it as a way to offset current costs. We often view it as more of a retirement vehicle where you can put away dollars. You’re spending out-of-pocket money for current costs, and you’re allowing those dollars to accumulate for exactly this scenario—where you have those gap years and you have this bundle of money that you’ve saved up. Depending on your age and how long you’ve had the HSA, you can accumulate pretty significant dollars, especially if you are in an account that gives you the option to invest the money and it’s over a really long period of time, and you’re able to get more than you could on the default money market or savings account option that is in a lot of plans. You can then use those dollars to pay those costs in the future to cover those gap years between when you separate from service and you get to Medicare.
Talli Sperry: That’s helpful. Great. Jackie, Steve, anything that you would add?
Jacklin Youssef: Sure. There are a number of other options that someone can consider to bridge their coverage until Medicare. One, if there’s a spouse and the spouse is still actively working, they can go under the spouse’s coverage. If that’s not available, they can look into the public marketplace plans currently available for individuals to have coverage between retirement through Medicare. And recognize that certain professional associations—CPAs, for instance—have professional association health care coverages. So there are a number of ways to be able to cover those gaps, recognizing, of course, that that could actually create a spike in their costs between retirement and Medicare.
Talli Sperry: Great. Steve, could I ask you to elaborate a little bit on Medicare Advantage versus traditional Medicare? We’re getting a slew of questions around this topic. And I know that we do have that guide in the Resource List widget. Sometimes interpreting that when we’re not as familiar with this can be complicated. Could you break it down really concisely?
Steve Weber: Right. There are a number of considerations you need to think about when you’re buying any health insurance, not just Medicare. One is “cost” and the “expected cost.” In general, for people who choose Medicare Advantage, there are some that cost nothing more than what it would cost for Parts B and D. So Part B being the hospital portion and Part D being prescription drug coverage. So you need to pay that to be in a Medicare Advantage plan, and there are some that have actually no additional premiums and will cover more than what you would probably get out of most traditional Medicare plans. You will pay a little bit extra for some, and you can even get more and more coverage, but you’re inside the network type of thing.
With traditional Medicare, there’s going to be a lot of gaps. The one that we tended to model in our paper that a lot of people use when they choose supplemental is Part F. It’s the most comprehensive. It has higher premiums. You’ll almost certainly pay more in premiums if you choose traditional Medicare plus Part F than you will if you had Medicare Advantage, again, that’s like an HMO. So there are going to be copays; there are going to be deductibles and things in a Medicare Advantage plan. Whereas if you go with Part F, almost everything is covered beyond the premium and it has a very high certainty of cost. So that number I gave earlier of the $5,200 is one that we assume someone buying traditional Medicare plus a Plan F supplemental because there’s not a lot of extra cost. The only extra costs if you’re in that type of thing are potentially some pharmaceutical costs because you’re still under Part D, which has copays and dental and vision. You might get that under a Medicare Advantage plan, but you definitely won’t get it under any traditional Medicare plan.
So it’s a tradeoff of the certainty of your costs against what’s likely to be maybe lower costs. Also, for some people it comes down to hassle, to some extent. So you go in, you have to pay a copay, and you don’t really know what things cost. Sometimes people want Plan F because it’s simple, and they know that whatever it is, it’s pretty much covered and they don’t have to worry about the fact that an anesthesiologist was out of network. So those are the tradeoffs you have. You almost certainly pay more in premiums if you go with traditional Medicare and say a Part F or a Part G, which is kind of the same thing. But you’ll have potentially a little more flexibility in the providers that you choose and a little more certainty in the costs that you’re likely to experience.
Talli Sperry: That was helpful for me, Steve, because as you were talking, I was realizing this is exactly what you said earlier. This is how we pick our benefits. It’s just that the “Medicare” word makes our head swim. So thank you to our Personal Advisor team on this one. It’s a super helpful discussion.
So we’re going to go to a few more live questions. Thank you for continuing to submit those. These are important topics, and we do want to talk about what you’re interested in, so keep them coming in.
This is from Carol, “Do you have any guidance for clients who are trying to decide whether they should get long-term care insurance?” Jackie?
Jacklin Youssef: Great question. That becomes one of the most common questions that we hear all the time, because when we started doing the research and we started talking about its annual health care and long-term care planning, the immediate question was “do we recommend long-term care insurance?” And I may have alluded to this earlier. We don’t necessarily lead with recommending to go out and buy long-term care insurance, but I mentioned that as an investor you want to explicitly plan to cover the possibility because, remember, it is a possibility of needing long-term care or needing to cover long-term care expenses using financial assets first but also recognizing that there are a number of other options including the possibility of insurance.
Insurance in itself has not traditionally been an ideal situation because those coverages tend to be expensive, hard to acquire. They have more of certain blackout periods before you’re able to start coverage. They also have maximum periods that they’re providing coverage for. So if someone is concerned about an extended need for long-term care beyond five years, there’s almost no insurance coverage out there that I know of that would offer an extended period of time such as this. So it makes it pretty difficult for us to go out and recommend insurance. But we clearly say to some clients who are interested or have some coverages, it is a viable option for you to consider as part of a different means to fund that specific situation.
Talli Sperry: That’s helpful. So it seems that we shouldn’t think of it as an absolute cover-everything guarantee. We do need to have these conversations with our advisor.
Jacklin Youssef: Exactly.
Steve Weber: And the truth is that not many people in the real world use long-term care insurance, but everybody has to deal with the problem of the question of long-term care.
As Jackie said, when we would say “long-term care,” everyone would say “long-term care insurance.” It’s like, no, we’re not necessarily talking about long-term care insurance. We’re talking about how to deal with the problem of financing and understanding how to finance long-term care. I think we do have a slide about who pays for long-term care.
Talli Sperry: This one is very interesting. I found this slide very insightful, so I’m glad you brought it up.
Jacklin Youssef: Yes. There’s a pie chart that talks about how most dollars and most payments for the cost are actually out of pocket from individuals. Under 10%, I believe 5%, is actually paid by insurance coverages. So it clearly shows how much is already paid today out of pocket versus through insurance coverages. We also recognize that while Medicare doesn’t traditionally cover long-term care, it covers a very small portion of short-term care coverage. So that really is what makes up most of the dollars that are paid for long-term care services.
Steve Weber: So it’s important when you look at this slide and you’re seeing these things, so that first one says, “Hey, what portion of people that experience paid long-term care get some of their funding from one of these sources?” And that’s where you see that Medicare is 93%. Most people in their first 100 days will get some coverage under Medicare, but it’s small and it’s not an answer for long-term care, which is why you see, in terms of dollars, that it’s not expected to be a significant contributor to those types of things.
Where the money is, is with you and me. Right? We’re paying out of our pockets. In the U.S., the funding for long-term care is generally either you paying for it or Medicaid. And in our world, we think of Medicaid usually as a failure scenario because you’re really only getting Medicaid to pay for your long-term care as a last resort.
And you’ve pretty much exhausted all your other assets if you qualify for Medicaid. So, in our world, we’re not helping people plan for Medicaid because we really see that as a failure retirement scenario in a lot of ways. But when we run scenarios with you, we try to help you understand how, say, a 95th percentile long-term care event might come into play when we’re running your scenarios. And maybe you’ll see your success rate change a little bit from “oh, I was 90% and now it’s 78%,” or something like that. But I think people get comfort in that to some extent. Maybe Kevin would know more about that than I would. But in the sense that it’s not necessarily a debilitating thing even to experience those costs.
Jacklin Youssef: I think that’s one of the neat things about the health care cost estimator, that it does take the long-term care scenario into play as well. So it does help our clients to understand what the probabilities are of them running into a long-term care situation and how much that is as well as looking at how to incorporate this as part of their own individual situation.
Talli Sperry: That’s where I want to jump to Kevin to have a little bit of a conversation. We have a presubmitted question on how we plan for this uncertainty amidst all we’ve talked about, so I’d love you to cover that question and then also layer in geography. So Ellen is asking a live question about what role geography plays. So how do you help us plan, Kevin?
Kevin Miller: Absolutely. One thing I would say from the uncertainty piece is that everything that we do in the service was really designed to be flexible—in that it’s not written in stone that we do it and then not touch it for the next 20 years. We know that things are going to change, and sometimes we want to look at different scenarios. What happens if they change? Sometimes something comes out of nowhere. Or it’s like “I’ve had this health issue and now my costs are significantly higher. How does that change my outlook?” And so we can look at all those.
The second part of the tool that we utilize, in addition to what your current year expenses will be, will also generate a lump-sum number for the long-term care piece. If someone wanted to add that in, if they fall into the category of someone that would end up needing the coverage, we would add it in and look at the change in your success rate. How does it change the likelihood of running out of money at some point in the future? And, again, it’s a starting point. Some people say, “I really have no idea what that would cost, so we’ll go with the Vanguard number.” Some people would say, “Let’s bump it up. Let’s be a little more aggressive with what we think the cost may be and how does it change things?” So that’s really helpful for people.
And then the second part of the question, in terms of geography, I think it’s just like anything else. Cost of living can vary pretty dramatically depending on where you live in the country. So if you live on the coast or in a really highly populated area, you can probably expect to spend significantly more than you would in other parts of the country. And the costs can be a pretty dramatic difference. They’re not fairly uniform across America.
Talli Sperry: I think that makes sense. As someone who grew up in Idaho and lives in Pennsylvania, I totally understand that point. So great.
All right, I’m going to stick with you a little bit longer because we have a presubmitted and a live question. And the live question is from Lori, and our presubmitted question is from Joette from Beulah, North Dakota. They’re both asking, “Medicare, how do we avoid the penalty if we don’t sign up for it in time?” So if we don’t sign up for Medicare at age 65, a penalty apparently occurs. How do we avoid that penalty?
Kevin Miller: Yes. So I think it’s what we talked about a little before. You have this window where you’re supposed to sign up for it, and then if you don’t but you continue to work, depending on the specifics with your company and some things that go around that, you can avoid having to pay the penalty long term. So that’s where you want to check with your benefits department to see sort of where you fall in that scenario.
Jacklin Youssef: Yes, the one nuance with those penalties is that they are generally not necessarily a onetime penalty. Those tend to be a lifelong penalty, so that’s why it is critical to certainly be aware of what the key dates are, when you will reach 65, and recognize that you need to start planning for this, I’d say, maybe six months in advance. Just understand what type of coverage you have through your employer, if you have one. And if you don’t, plan on actually signing up for this on time to avoid those penalties because the penalties apply to Parts B and D if I recall.
Steve Weber: Right. And there is a window that starts three months before you’re age 65 where you really want to be signing up in that window.
The window lasts for six months, but if you wait until the end of that, you may not be covered right at that point immediately. There’s a period of time before coverage takes effect. So if you want to be covered as soon as you’re eligible, then you really want to be signed up in that three-month period before you hit 65.
Jacklin Youssef: Exactly. Back to Kevin’s point, if that person is actually still working, they’re able to delay the enrollment until they decide to retire.
Steve Weber: The point of these penalties that people are talking about is, if you don’t sign up in that six-month window and you don’t, for example, sign up for Part D, if you ever do decide to sign up for Part D, it’s going to be more expensive for the rest of your life, and the same thing is true with Part B. So you do want to be on time when you’re signing up for Medicare the first time. And if you are delaying, you want to be on top of it when you do retire.
Right? Then you want to make sure that you’re in there right away. Those are things to keep in mind when you’re dealing with Medicare.
Talli Sperry: Thanks for looking out for us and making sure we really are grounded in that point because I’m sure many of us feel very young at 65, and this is not the stuff that’s top of mind. Travel probably is. All right, that’s good stuff.
So we’ve talked a lot about planning for ourselves and these expenses, but we do have a presubmitted question that’s related to planning for couples. So Cody from San Antonio, Texas, is asking, “When saving for health care in retirement as a couple, should the health care fund be something that you both contribute to or should you establish separate health care funds?” Jackie, maybe you can ground us in research, and Kevin, you can talk a little bit about what you see clients do.
Jacklin Youssef: So one of the things to keep in mind is that if you have a high-deductible plan and have a health savings account like what Kevin had described, those tend to be coverages and individual types of plans. So in that case, each spouse is able to maximize their own contribution to their own health savings account.
Keep in mind, of course, the Medicare program is per individual. A lot of the couples that we’re working with are not necessarily identical in age, so you may have one who actually qualifies for Medicare while the other one is not, so that becomes one of the planning challenges as to how to maintain coverage for that spouse. Is it essentially someone who’s actually still working? Are they going to find a way to continue to bridge coverage until Medicare? That’s one of the more unique situations when you’re dealing with health care planning, recognizing that there are a number of ways to be able to coordinate coverage for both spouses.
Kevin Miller: And I would also say that when it comes to selecting plans—we were talking before about what other people have done—sometimes you’ll see it, especially with Part D coverage. And it’s like, “Well, I’m just going to pick what my spouse has.” But depending on the medications they utilize, it could be that the plan your spouse has isn’t the right one for you. Based on your medications, there may be one that covers a lot of what you utilize that wouldn’t cover a spouse. So things like that can be really important as well.
Talli Sperry: So that if we save together, we should make individual choices. And Kevin, as our personal advisor, do you talk to each of us individually in a couple or do you just have one conversation?
Kevin Miller: I would say more often than not, we have a single conversation because people really view things as our assets. I have some couples that view things separately for any number of reasons. But normally they view it together, and they assume that Spouse A dies and then all the remaining assets go to the remaining spouse and it continues on. And in our planning for things, when we look at projections around sustainability and whether you’re going to get to your goal, the baseline assumption for us is that the younger of the two spouses gets to age 100, so that’s what we use as the norm.
Talli Sperry: That’s great. So it’s very realistic planning on that arc. Good.
This is an interesting presubmitted question, and this is from R.S. who is asking, “Where should self-employed individuals turn to for advice, guidance, and information?” And it’s a really good point because we have talked a lot about employer plans and gaps there. So any information for self-employed individuals?
Steve Weber: We talked about the hidden costs you get with subsidies and all those types of things. If you’re self-employed, you have a much more realistic picture of what your health care costs are before retirement because you’re already paying them.
In terms of the types of coverages that you can get and things like that, well, those markets are kind of what they are to a large extent.
Jacklin Youssef: It’s similar to the options we talked about to bridging to Medicare. So if there is a spouse, understanding whether there could be coverage under the spouse’s program or looking at the current public marketplace plans. I mean those plans are available today. They’re somehow based on medals, so we know that the most popular today are the Silver and the Bronze plans.
Depending on the income level for that individual or the household, the individual may actually qualify for tax subsidies, in that case, toward the premiums that they’re paying. But those are clearly options available between now and Medicare for that person.
Steve Weber: And it makes a little more sense maybe to think about the subsidies for the retiree because you get rid of your income. Maybe you can manage your income to a place where the subsidies are applicable to you where they might not have been before. The self-employed person probably doesn’t have as much ability to get those.
Talli Sperry: In terms of employer subsidy, right.
Steve Weber: And in that market, coverage is expensive.
On the flip side though, it’s good because you’re already dealing with those expenses. You’re not going to see an increase when you hit retirement. You’re likely to see a decrease in your health care costs in those circumstances.
Talli Sperry: Great. And I can imagine, Kevin, we could always call our personal advisor on this too, right?
Kevin Miller: Absolutely.
Talli Sperry: Great. So we’re coming to a point where I’d like to gather some final thoughts. So maybe Jackie, you could summarize this discussion. What would you say would be the key takeaways from Kevin, from Steve, from this entire conversation? What should we go away with?
Jacklin Youssef: So planning for health care is not as scary as it may have initially looked. I know we walked away with a number of personal takeaways, understanding how each one’s number can actually be unique but recognize that when it comes to something like long-term care planning, this can also seem to be this daunting planning situation. But at the end of the day, each one of us can understand how much of it we’d want to actually cover, and we have a number of options, working with our financial advisors, to come up with ways to cover those potential expenses.
Talli Sperry: Great. I think that’s a really good summary. So thank you guys very much for being here tonight.
Jacklin Youssef: Thank you.
Talli Sperry: We have covered a lot of material. And thank you all for being with us as well, members of the Vanguard community. If you would share a few more seconds of your time, we’d be grateful if you’d select the red Survey widget. It’s the second from the right at the bottom of your screen. We truly do value your feedback on tonight’s webcast, and we would welcome your suggestions for future topics that you’d like us to cover, especially for you, our PAS clients.
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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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