Perspectives : DC Retirement | June 20, 2024

Vanguard's Health Care Cost Estimator: Planning for one of the biggest costs in retirement

Mary had done all the right things to prepare for retirement, except one: She hadn’t considered her annual health care costs. Like many pre-retirees, she hadn’t fully understood that, for most people, health care costs are the single greatest expense in retirement. 

Now that she was retired, Mary found that health care expenses were taking a big bite out of her monthly budget, requiring a lifestyle change.

If only those costs could have been anticipated.             

Now, they can be. 

New for retirement plans: A tool to predict retirement health care costs

Vanguard has created a sophisticated yet easy-to-use Health Care Cost Estimator for all participants in our 401(k) plans. Based on an actuarial model developed in partnership with Mercer Health & Benefits, an expert in health care and insurance costs, our tool produces health care cost estimates that are personalized for each participant.

Unlike other retirement industry calculators, Vanguard’s estimator considers individual factors such as health status, coverage choices, income, and geography to project a participant’s expected annual medical expenses in retirement. Our calculator also generates a lifetime sum for long-term care costs.

Even if they don’t have a catastrophic health event, someone may incur significant health care costs over a long retirement. By shining a light on what is commonly a savings blind spot, Vanguard’s tool increases the likelihood that employees will save more—and with greater confidence.

And our tool gives plan sponsors yet another way to help their employees improve their financial well-being.

What’s different about Vanguard’s estimator

The health care cost estimates that some recordkeepers produce are based almost exclusively on national averages and assumptions. Employees can easily dismiss these projections because they’re not personalized. But when a cost estimator considers such factors as their health, their coverage, and their region’s health care costs, as Vanguard’s does, the projected costs become more meaningful—and harder to ignore.

Vanguard’s purposeful, personalized approach to retirement planning is an extension of our commitment to improving outcomes for both plan sponsors and participants. After all, the promise of Vanguard Well on Your Way® is to help employees achieve financial well-being up to and through retirement. And we’re proud of the progress we’ve seen: The average full-career participant in a Vanguard plan is on track to replace nearly 70% of their current income in retirement.1  

As employees incorporate into their financial planning the personalized health care cost estimates that the calculator provides, some will decide to save even more, and we expect to see income replacement ratios continue to rise.2

Another dimension to financial well-being

Plan sponsors say they're growing more concerned about their employees’ financial well-being. Every year, more and more employers are implementing 401(k) plan features such as automatic enrollment and employer match to boost their employees’ retirement savings. And we see growing interest in our Retirement Income offer, ranging from annuities to retirement paychecks to education and advice. Now, with Vanguard’s Health Care Cost Estimator, participants can get a more holistic view of their likely retirement income needs.

How we help employees project their likely health care costs in retirement

Available at no extra cost through the Participant Experience, the Health Care Cost Estimator prepares employees for health care costs they can expect to incur, including Medicare expenses and the significant cost of long-term care.

  • Personalized annual health care costs in retirement. Vanguard’s calculator provides employees with an annual estimated cost for health care expenses rather than a lump-sum amount for the duration of their retirement.3 We take this approach because it’s easier for an employee to understand annual expenses and relate them to their current spending level.

    The tool’s presence on the financial wellness hub puts retirement health care costs front and center, making it hard for participants to ignore this critical piece of the retirement planning puzzle. Rather, by providing personalized recommendations that take much of the guesswork out of planning for health care in retirement, the estimator can help participants fulfill their retirement dreams.

  • Making the most of Medicare. Medicare insurance can be confusing because of its numerous parts. Yet it’s the foundation of the American retirement health care system. For that reason, it’s essential for people to understand it. To help do-it-yourself retirement planners in understanding Medicare plan options, the Health Care Cost Estimator includes a clear and concise educational component about Medicare.

    For those who want more guidance in identifying the most suitable Medicare insurance option for their needs, we offer a solution through Advice from Vanguard. For participants with access to advice, the Health Care Cost Estimator includes a Medicare Match function. Medicare Match identifies the option that most closely fits an individual’s criteria, raising their confidence that they’re making the best decision for their situation.

  • Long-term care costs. Not all health care cost calculators project the cost of long-term care4 because it represents a separate and difficult planning challenge. Neither Medicare nor supplemental health insurance covers ongoing long-term care. Although long-term care policies can fill this coverage gap, they can be difficult to obtain or afford.

    Even though many people will never incur these costs, everyone faces a small but meaningful risk of requiring care for multiple years. That’s why Vanguard’s Health Care Cost Estimator produces a lump-sum estimate for long-term care, again based on the individual’s attributes.

Pulling it all together

Employees have long had the ability to estimate their retirement income and expenses using the interactive calculator and worksheet in the Participant Experience. Now, they can use the Health Care Cost Estimator to better predict their retirement health care expenses and add that annual estimate into the mix. Participants can have greater confidence in their projection given the tool’s degree of personalization.

One way to save: An HSA

A health savings account (HSA) can be a long-term investment account to pay for health care costs. Vanguard has a special partnership with a leading HSA provider, HealthEquity.

Going forward: Enhanced planning

As the biggest expense that retirees face, health care deserves our attention when we talk about employees’ financial futures. If Mary had used a health care cost calculator during her working years, she might have avoided, or at least lessened, the financial pain her health care costs were causing her during retirement.
Our goal in providing this tool is to help participants anticipate their health care costs in retirement. Like you, we want to help employees avoid, or at least mitigate, the financial trauma that can be caused by adverse health events in retirement. We hope all plan participants use this new tool in good health and will live well in retirement.

For more information about the Health Care Cost Estimator and our other retirement income tools, reach out to your Vanguard representative. 


1Source: Vanguard, as of December 31, 2023.

2A replacement ratio is a percentage of pre-tax income at retirement that someone will need to maintain their current standard of living.

3Our Health Care Cost Estimator also produces a personalized long-term care calculation in the form of a lifetime lump sum.

4Long-term care services help individuals for an extended period with activities of daily living (ADLs): bathing, dressing, toileting, transferring (getting out of a bed or chair), continence, and eating.

All investing is subject to risk, including the possible loss of the money you invest. 

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.