An Alternative Way to Calculate Health Care Expenses in Retirement

 In Retirement Planning & Wealth Management

Many financial advisors and their clients find it difficult to project health care costs in retirement. But a new study offers strategies that may help, says Matt Sommer, Director of the Retirement Strategy Group, and Ben Rizzuto, Retirement Director.

Health care is likely to be one of the largest expenses a client faces in retirement. Consider: In 2018, a couple aged 65 was estimated to need $296,000 in savings for a 90% chance of covering medical costs in old age, according to the Employee Benefit Research Institute1.

The figure is substantial – and just a starting point, given the difficulty of predicting health care costs. Still, a growing body of research shows that retirees wish they had thought more about medical expenses prior to leaving the workforce, making this calculation an important one for advisors and their clients.

Fortunately, a joint study from The Vanguard Group and Mercer offers an alternative way of calculating health care costs. Rather than focus on a lump sum, the report says to look at what medical expenses could be for a retiree on an annual basis. And for a more accurate estimate, advisors and their clients should consider four criteria: health risk, supplemental coverage, geographic location and income.

By taking clients through a simple set of questions, you can potentially put clients’ minds at ease and create a more fine-tuned financial plan.

Health Risk

As a first step, determine if a client’s health is considered to be low, medium or high risk. Health conditions can intensify as people age, but establishing the current risk level is an important starting point.

Does your client have two or more chronic conditions? Does he or she smoke? High-risk individuals typically are smokers, visit the doctor regularly and have two or more chronic conditions, while low-risk individuals are free of chronic conditions.

Depending on the risk level, a client could face annual health care costs ranging from a median of $3,400 (low risk) to as much as $7,600 (high risk), according to the study2.

Supplemental Coverage

The type of Medicare coverage a client chooses, including whether he or she opts for a supplemental (Medigap) policy, will also impact health care costs in retirement.

In 2018, annual premiums for traditional Medicare, Supplement Plan F or Supplement Plan N were $1,800, $2,900 and $3,600, respectively. Once the type of coverage is determined, you can then project out-of-pocket costs based on the client’s health risk level. Plan N, for example, has higher premiums but offers more comprehensive coverage, which could reduce out-of-pocket costs for high-risk individuals.

Have retirement or wealth strategies questions?


Location matters when it comes to Medicare premiums. According to the study, in 2018, premiums for the least-expensive Supplement Plan F ranged from $1,488 to $3,348 across the country. And while the Northeast had some of the highest costs, other states such as Missouri and Minnesota had higher premiums than typically pricey areas such as California and Virginia.


The final piece of this puzzle is income. Medicare Part B and Part D premiums will vary based on a recipient’s adjusted gross income, as well as marital status. Taking this into account will add another layer of detail to the estimate.

Putting It All Together

Using these four criteria, you may be better able to estimate your client’s health expenses. According to the study, in 2018, a typical 65-year-old woman could expect about $5,200 in health care costs. That amount may seem more achievable for clients, as well as easier for you as an advisor to plan around.

The opinions and views expressed are as of the date published and are subject to change without notice. They are for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security, investment strategy or market sector. No forecasts can be guaranteed. Opinions and examples are meant as an illustration of broader themes and are not an indication of trading intent. It is not intended to indicate or imply that any illustration/example mentioned is now or was ever held in any portfolio. Janus Henderson Group plc through its subsidiaries may manage investment products with a financial interest in securities mentioned herein and any comments should not be construed as a reflection on the past or future profitability. There is no guarantee that the information supplied is accurate, complete, or timely, nor are there any warranties with regards to the results obtained from its use. Past performance is no guarantee of future results. Investing involves risk, including the possible loss of principal and fluctuation of value.

1. Vanderhei, Jack; Paul Fronstin. “Savings Medicare Beneficiaries Need for Health Expenses: Some Couples Could Need as Much as $400,000, Up From $370,000 in 2017.” EBRI Issue Brief, 8 Oct 2018.
2. Mercer-Vanguard health care cost model, 2018. All estimates are for a 65-year-old woman.

The information contained herein is for educational purposes only and should not be construed as financial, legal or tax advice. Circumstances may change over time so it may be appropriate to evaluate strategy with the assistance of a professional advisor. Federal and state laws and regulations are complex and subject to change. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of the information provided. Janus Henderson does not have information related to and does not review or verify particular financial or tax situations, and is not liable for use of, or any position taken in reliance on, such information.

C-0319-23326 04-30-20

Receive updates from our experts.