Estimating Postretirement Health Care Costs - Part 1: Pre-Medicare

One of the most important costs all of us face is health care. For financial planning purposes, it is necessary to project this cost into our retirement years. For those who retire before age 65, the health insurance situation is very different compared to after age 65 due to Medicare. For our purposes here, we will focus on the pre-Medicare period.

Generally, our first choice for retirees no longer covered by a subsidized group plan is COBRA, the 18-month continuation of employer-sponsored group insurance except that the retiree is responsible for the entire premium. Those who no longer have any access to a group plan are left with the individual health insurance market, a construct of the Affordable Care Act (ACA).

As you are probably aware, ACA mandates the offering of four levels of coverage—bronze, silver, gold, and platinum. There are no exclusions for pre-existing conditions, and the 2021 out-of-pocket maximum is $8,550 for an individual and $17,100 for a family plan. In general, the more you expect to utilize health care services, the higher the coverage level you should consider.

For people whose modified adjusted gross income is under 400% of the federal poverty line ($51,520 for an individual and $68,960 for a married couple), premium subsidies may be available. All of the ACA plans we have encountered have been HMOs, PPOs, and EPOs. We have found the EPO (Exclusive Provider Organization) structure to be especially pernicious, as seeing a specialist or using a hospital outside the network incurs a potentially catastrophic cost that is completely unrecognized for the purpose of meeting deductibles or maximum out-of-pocket expenses. We have seen PPO plans convert to EPO plans, so it is important to pay attention to any announcements sent by the insurer. Unfortunately, many insurers have exited the individual health insurance market, leaving us with fewer and fewer choices.

So how much should you expect to spend on health care in retirement? As you may have surmised, it’s complicated and dependent on many factors such as your health, where you live, and what level of coverage you choose to buy. The good people of Vanguard have recently made their Health Care Cost Estimator available to us. We ran a scenario for a healthy 60-year-old electing the bronze level of coverage with no premium subsidy in our zip code of 92618 (Irvine, CA). It gave us an estimated annual cost of about $8,000 which will increase with inflation (i.e., health care related inflation, which has been much higher than general inflation). A married couple would expect to pay double that. Undoubtedly, this $16,000 would likely constitute a substantial chunk of the annual withdrawals from a couple's retirement nest egg.

This example illustrates the importance of understanding the impact of health care costs on retirement. If you would like our assistance in estimating these costs for you, please do not hesitate to reach out to us.