Health Care Costs in Retirement: How to Plan Ahead
When planning for retirement, people often assume Medicare will cover their medical bills, but in fact many retirees will face out-of-pocket costs that, over time, could reach into the six figures.
While it’s difficult to predict for sure what your actual health care costs in retirement will be — especially in light of today’s longevity — it’s wise to work with a ballpark figure in order to create a safety net of savings that will cover you, no matter what your needs will be in the years to come.
Key Points
• Planning for retirement should take health care costs into account, such as potential out-of-pocket costs and long-term care.
• According to research, the average 65-year-old individual may need $165,000 in savings to cover medical expenses in retirement (and double that amount for couples).
• Medicare covers medical costs such as preventive care, doctor visits, prescription drugs, inpatient hospital stays, short-term rehab, and hospice.
• Medicare Advantage Plans are Medicare-approved, private insurance plans that may cover medical basics as well as other expenses, such as vision, hearing, and dental.
• Health savings accounts (HSAs) and long-term care insurance can help pay for medical expenses not covered by Medicare.
Health Care in Retirement
The cost of health care in retirement can be overwhelming. According to the annual Fidelity Retiree Health Care Cost Estimate in 2024, a typical retired couple aged 65 could spend as much as $330,000 in after-tax savings on medical expenses during the course of their retirement.
That figure doesn’t include related health costs such as dental services, over-the-counter medications, or long-term care — which are not currently covered by original Medicare.
Long-term care expenses can be especially onerous, with the median cost of a private room in a nursing home running about $116,800 per year, according to the 2023 Genworth Cost of Care Survey. This, too, is an expense that many people may need to factor into their retirement plans, given the growing number of people living into their 80s and 90s — or longer.
This “new longevity,” as it’s sometimes called, may also lead to additional health-related costs down the line that are difficult to anticipate now, but require educated estimates nonetheless — especially for women, who live on average about five years longer than men.
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How Much to Budget for Health Care Costs in Retirement
To create a realistic plan for retirement, and make optimal financial decisions about investing for retirement, insurance coverage, and the timing of important government benefits — the starting point is to look at how much money will be coming in, and how much will be going out to pay for likely health issues.
Social Security Benefits
While Social Security benefits depend on an individual’s work history, as well as the age when they first file for Social Security, the key thing to know about this source of income is that it’s limited. The average monthly payout, starting in January 2024, was $1,907. And the maximum possible benefit amount is $3,822 per month, for those who retire at full retirement age in 2024.
Individuals can file for Social Security starting at age 62, generally speaking, but “full retirement age” is 67 for those born in 1960 and later. To get a more accurate estimate of your own benefit amount, go to SSA.gov.
Private Sources of Income
Fortunately, most retirees also have savings or a pension, which can add to their income. Nearly 80% of retirees reported having one or more sources of private income, in addition to Social Security, according to the Economic Well-Being of U.S. Households in 2022, by the Federal Reserve Board.
For example, you may have opened a retirement account like an IRA or an employer-sponsored plan, such as a 401(k), that may offer an additional source of income.
If you’re freelance or a small business owner, you may have a SEP IRA or a SIMPLE IRA — common retirement plan options for the self-employed.
The point is to have a grasp of your income sources in retirement, as well as your anticipated cash flow, so that you can cover medical costs in retirement.
Understanding Health Care Costs
As costs vary considerably depending on one’s region, age, and overall health, it can be difficult to estimate the precise amount to set aside for health care in retirement.
Start by assessing your overall health today, and speaking to your doctor(s) about any chronic conditions, genetic predispositions, and any other risk factors that could impact the care you need as you get older.
Unfortunately, there’s almost no way to predict with any accuracy the types of conditions or care you might need, or what they will cost, when preparing for retirement. But in some cases this thought exercise may help you anticipate some upcoming costs, so you can factor that into your overall estimate.
Of course, not all of your medical costs in retirement will be out of pocket; Medicare (and Medicaid, if you qualify) cover many medical expenses. But this insurance is another expense to factor in.
What Does Medicare Cost, What Does It Cover?
Medicare is a medical insurance program offered by the federal government for those 65 years and older, and those who are disabled. Medicare will pay certain health care expenses in retirement, but with restrictions. Dental, vision, and hearing care, including hearing aids, are not covered by Original Medicare, generally known as Parts A and B.
Also, as noted above: Medicare does not cover long-term care, like an assisted living or nursing home facility.
Note that you must apply for Medicare benefits within a certain window, or risk being penalized with higher premiums. Generally, the Initial Enrollment period begins three months before you turn 65, and it ends three months after the month in which you turned 65. Some exceptions apply (for example, if you have health insurance through your employer, or were affected by a natural disaster).
Be sure to check the terms that might apply to your situation to avoid a penalty.
Understanding Medicare Coverage
The following terms generally apply to those with a modified adjusted gross income (MAGI) over $103,000, or $206,000 for a married couple. If your premium is subject to an income adjustment, it could be as high as $594 per month (though according to the Centers for Medicare and Medicaid Services (CMS), the highest rate generally applies to people with incomes over $500,000, or $750,000 for a married couple).
• Medicare Part A covers inpatient hospital stays and treatment, as well as skilled nursing care (i.e. short-term rehab), limited in-home care and hospice. As long as you or your spouse had sufficient Medicare taxes withheld through your job (generally at least 10 years), you won’t pay a monthly premium for Part A. The deductible for Part A is $1,632 in 2024.
• Medicare Part B covers outpatient care, preventive care, and visits to doctors. The monthly premium for Part B is about $174 per month, with a roughly $240 annual deductible in 2024.
• Medicare Part D covers prescription drugs. The monthly premium is about $55.50 in 2024.
Medicare Part C, or Medicare Advantage Plans, is a bit of a separate case. Medicare Advantage plans are private insurance plans that are Medicare-approved, and may cover vision, hearing, or dental needs, as well as the medical basics and prescriptions covered by Parts A, B, and D. Medicare Advantage plans are optional.
While the Advantage Plans are designed to fill in certain gaps in coverage, you want to make sure the costs are manageable, and that you’re not paying for overlapping policies.
Medicare Costs
In other words, assuming at least one hospital stay that requires you to pay the deductible, the basic cost of Medicare alone is about $4,600 per year. Again, that doesn’t include:
• Vision care
• Dental care
• Hearing care or hearing aids
• Long-term care
Most people will need some or all of those types of health care as they get older, which could add to your potential out-of-pocket expenses over time, and speaks to the need for some emergency savings.
Other Ways to Pay for Health Care
In addition to Medicare, there are other ways to pay for medical expenses during retirement, including HSA accounts and long-term care insurance.
Health Savings Account (HSA)
When choosing a health insurance plan before you retire, consider one that comes with a health savings account (HSA) that may help you save money for retirement medical expenses. These accounts generally come with high-deductible health plans (HDHPs), and provide three substantial tax benefits:
• Contribution deductions
• Tax-deferred growth
• Withdrawals without taxation for qualified medical costs
The accounts take pre-tax deposits to cover health care costs that are not covered by insurance. The unspent money in an HSA rolls over from year to year. Most important, the money in an HSA account belongs to you, even when you are no longer participating in the original high-deductible plan.
What Your HSA Savings May Cover
HSA funds can be used to pay for a variety of medical expenses in retirement. For instance, prescription drugs, eyeglasses, hearing aids, and other medical supplies can generally be purchased with HSA funds.
Additionally, you can use HSA savings to cover deductibles and co-payments for medical care. Medicare premiums and long-term care insurance premiums can also be covered using HSA funds.
By utilizing catch-up payments and employer contributions, those who are already over 50 can still get the most out of these programs. A catch-up payment of $1,000 per year, in addition to the maximum contribution limit, is allowed for people 55 and older. One can use an HSA to pay for yearly physicals or other preventative exams covered by an HDHP.
A benefit of utilizing an HSA to cover medical expenses in retirement is that the money in the account can be invested, allowing it to increase in value over time. This might be helpful for people who wish to have a dedicated source of savings to cover medical bills.
It’s worth noting that funds in an HSA must be used for qualified medical expenses in order to be withdrawn tax-free. It’s a good idea to consult a tax professional or review IRS guidelines to ensure that HSA funds are being used appropriately.
Long-Term Care Insurance
Another approach to bridge the Medicare gap is to get long-term care insurance. This kind of insurance can provide a monthly benefit for long-term care, either for a few years or for the rest of one’s life.
The expenses of long-term care such as in-home care, assisted living, and nursing facility care, can be covered in part by long-term care insurance. These services are often required by people who are unable to do activities of daily living on their own, such as eating, dressing, or bathing, due to a chronic disease or disability.
That said, these policies can be complex, as well as expensive, and it may be wise to consult with a professional before purchasing coverage.
The Takeaway
Medical expenses can be a large portion of one’s retirement budget. As daunting as it may seem, calculating these expenditures ahead of time and developing an insurance and spending plan will help you save more of your retirement funds for other needs.
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FAQ
How much does the average person spend on health care in retirement?
Health care costs depend on a variety of factors, but on average a healthy person over age 65 could spend as much as $165,000 during their retirement ($330,000 per couple).
How do I prepare for health care expenses in retirement?
A few ways to prepare include making a retirement budget, saving in a retirement account, funding a health savings account while still employed, making sure to get adequate medical insurance through Medicare and/or private Advantage plans once you turn 65. You may want to consider long-term care insurance as well.
How do I save for out-of-pocket medical expenses?
Ways to save on out-of-pocket medical expenses include shopping around for the best prices on health care services, making use of preventive care services to help reduce the need for more expensive treatments in the future, and purchasing insurance to help cover unexpected medical costs. In addition, funding a health savings account (HSA) when it’s offered is a tax-advantaged way to set aside money for health care costs.
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