Health care costs in retirement

Key points

• The average retiree may need $165,000 to cover health care costs in retirement.
• Medicare can help cover health care costs in retirement, but it won’t cover everything.
• Keep an eye on your retirement plan and adjust it as needed.

Rising health care costs are threatening to turn retirement dreams into retirement nightmares. According to the Fidelity Retiree Health Care Cost Estimate, the average retiree age 65 will need around $165,000 to cover health care expenses during retirement. This doesn’t include housing, bills, food or other costs.

But there are ways to plan ahead and mitigate these expenses. Financial planning, Medicare benefits and other health care options can help you protect your retirement savings and peace of mind.

Rising health care costs are a big issue

For many Americans, having hundreds of thousands of dollars for retirement isn’t a luxury. It’s a necessity.

Health care costs are predicted to increase by an average of 5.6% per year through 2032, according to the Centers for Medicare and Medicaid Services.

They break down as follows, according to Fidelity Benefits Consulting:

• 10%: Generic, branded and specialty drugs.
• 43%: Medicare Part B and Part D premiums (for doctor appointments and prescription drug coverage).
• 47%: Other medical expenses (such as copays, coinsurance, and deductibles for doctor and hospital visits).

These costs assume you qualify for original Medicare and don’t have an employer-provided retiree health plan.

5 steps to mitigate health care costs in retirement

Handling the high costs of health care in retirement takes preparation and discipline. Financial experts versed in health care costs advise taking the following five steps to cover costs.

1. Know your cost targets

There are three areas of health care costs you must cover: 

1. Premiums. The amount you pay monthly for coverage will be a major factor in your health care costs in retirement. Medicare Part A may have $0 premiums, but Part B’s premiums depend on your income.
2. Out-of-pocket expenses. This is the total amount of money a health care consumer pays on their own. Your insurance plan may include an annual out–of-pocket maximum for covered health care services. But you’d be on your own for any uncovered expenses.
3. Long-term care. Long-term care can account for a huge chunk of overall retirement health care costs. (Note that the $165,000 figure mentioned above doesn’t account for long-term care). This includes nursing home stays and in-home nursing with a medical attendant. According to SeniorLiving.org, the annual cost for a private nursing home room in 2024 is about $120,300. These costs can easily throw a wrench into your retirement spending plan.

People who retire before they reach Medicare eligibility (65 in most cases) often worry about their health care premiums.

“If you choose a lower-premium plan, you are effectively gambling that you are going to stay healthy,” said Jay Zigmont, a certified financial planner and the founder of Childfree Wealth, a financial planning firm. “Lower premiums come with higher out-of-pocket costs and maximums.”

Cost of long-term care

Remember that these are today’s figures, based on data from SeniorLiving.org and ACL.gov. They’ll go up with inflation.

2. Get acquainted with Medicare

Medicare can play a big role in retirement. Future recipients should get familiar with it.

“The financial role that Medicare plays in retirement depends on what parts of Medicare you enroll in,” said Lindsay Malzone, the Medicare expert at Medigap.com, a plan comparison platform.

Part A is premium-free if you pay 40 quarters, or 10 years, of Medicare taxes.

But there’s a caveat. Part A covers only inpatient hospital stays, skilled nursing facility care, hospice care and some home health care. For other coverage, you must enroll in Part B. The monthly premium for Part B varies based on income. Part A and Part B also have deductibles and coinsurance.

2024 Medicare Part B premiums

Other options, such as Medigap and Medicare Advantage plans, can help fill coverage gaps. Medigap and Medicare Advantage plans are available from private health insurance companies. They can help pay for your share of health care costs. You must buy and pay for Medigap on your own. The costs depend on the policy you choose and the pricing structure in your state.

Medigap gives you more predictable out-of-pocket costs but comes with a monthly premium. Medicare Advantage can have a low or even zero-dollar monthly premium. But it’s a pay-as-you-go type of plan. You can expect high out-of-pocket costs and limitations on networks and coverage areas, Malzone said.

Medicare Advantage plans often come with prescription drug coverage. If you enroll in Medigap, you must register in a stand-alone Part D prescription drug plan. Medigap costs depend on the policy you choose and the pricing structure in your state.

Overview of Medicare plans

3. Know your best coverage-gap options

You may want to consider other private insurance coverage in addition to Medigap and Medicare Advantage. But private insurance is generally more expensive than Medicare, especially when it comes to out-of-pocket costs.

Comparison of private insurance and Medicare deductibles

Private insurance plans might have greater out-of-pocket costs than Medicare plans (even combined).

Still, you’ll need a plan for both expected health care costs and long-term care. And long-term health care isn’t covered by most regular health insurance policies. Medicare also doesn’t cover long-term care or custodial care unless medical care is needed.

So you may want to consider long-term care insurance in addition to health insurance. Note that some life insurance policies offer living benefits. These may allow you to use death benefits to cover long-term care costs while you’re alive.

4. Leverage a tax-free health savings account

Health savings accounts are available to those with high-deductible health plans. HSAs can help future retirees with health care costs in retirement by saving pretax dollars. They may also be fortified by employer contributions.

HSAs are triple tax-free. You don’t pay taxes on what you put in. It grows tax-free. And it comes out tax-free as long as you spend the money on health care costs.

There are other health savings options for people who don’t have HDHPs. These include flexible spending accounts and health reimbursement arrangements. But FSA and HRA funds generally stay with your employer if you leave your job. This means they won’t help you in retirement. Some employers offer HRAs for retirees, however, allowing you to use the funds to pay for health care expenses in retirement.

5. Get regular checkups to get ahead of health issues

You can’t control everything about your health. But you can see where you stand and make changes based on that information.

Annual checkups and illness screenings can be great ways to help you understand your health risks. You can then make targeted improvements and potentially fend off illnesses.

Example: If lifestyle changes can help you avoid developing a chronic illness, you may be able to avoid the costs that come with such a diagnosis. These include prescriptions, treatments and doctor visits.

Health care costs for retirees can be daunting. But planning and health maintenance can help you prepare to face your golden years with confidence.

Frequently asked questions (FAQs)