How to Plan for Healthcare Costs in Retirement
- Adam Smith, CFP®
- 2 days ago
- 13 min read
For those who spend between $100,000 to $300,000 per year on expenses in retirement, healthcare costs can consume between 4.4% to 13.2% of your retirement budget.
The average couple who retires at age 65, according to Fidelity, needs $330,000 for medical expenses throughout retirement.
And, this excludes the potential cost of memory care or dependent living.
Here's how much healthcare costs may represent as a percentage of your total expenses in retirement.
Table calculation: Fidelity Investments – 2024 Retiree Health Care Cost Estimate. A 65-year-old couple retiring in 2024 can expect to spend approximately $330,000 on healthcare in retirement. Based on a projected lifespan of roughly 25 years. Annualized Estimate: $330,000 ÷ 25 years = $12,600 per year.
That's why creating a comprehensive healthcare funding strategy that includes Medicare planning, supplemental insurance, and dedicated healthcare savings accounts is essential for protecting your retirement nest egg.
Introduction to Healthcare Costs in Retirement
After 30 years of working different jobs - Sarah at the bank and Tom in sales - they could finally sync their schedules. They had big plans for retirement - that Alaska cruise they'd been talking about since their kids were little, and maybe finally learning to play pickleball together at the rec center.
Sarah was especially excited about having more time with their twin granddaughters, who lived just two towns over. Tom kept joking that he'd trade his frequent flier miles for hiking boots, but Sarah knew he was just as thrilled as she was to start this new adventure together.
Then reality hits – Sarah and Tom are hit with a medical emergency in retirement that costs $25,000 out of pocket, despite having Medicare coverage.
This scenario plays out for many retirees each year who underestimate healthcare costs in retirement.
This scenario plays out for many retirees each year who underestimate healthcare costs in retirement.
According to Fidelity's 2024 Retiree Health Care Cost Estimate, a 65-year-old individual retiring today will need approximately $165,000 to cover healthcare expenses throughout retirement – and that figure doesn't include long-term care costs.
The challenge isn't just the total amount; it's the unpredictability and rapid inflation of medical expenses. Healthcare costs have historically risen faster than general inflation, averaging 3.3% annually over the past decade compared to the general inflation rate of 2.9%.
For affluent retirees with substantial assets, these costs represent more than just numbers on a spreadsheet. They can significantly impact even well-funded retirement portfolios if unplanned for.
The good news?
With proper planning and the right strategies, you can protect your retirement assets while ensuring access to quality healthcare.
This guide will walk you through everything you need to know about planning for healthcare costs in retirement, from understanding Medicare to creating tax-efficient funding strategies.
Key Takeaways
Healthcare costs can consume 4.4 to 13.2% of your retirement budget, requiring dedicated planning beyond general retirement savings
Medicare covers only about 80% of healthcare costs, leaving significant gaps that require supplemental coverage
Tax-advantaged accounts like HSAs offer triple tax benefits and should be maximized before retirement
Long-term care planning is essential, as 70% of people over 65 will need some form of long-term care services
Healthcare inflation typically outpaces general inflation by 2-3% annually, requiring inflation-adjusted planning
Delaying retirement until 65 can save hundreds of thousands in healthcare costs by avoiding pre-Medicare coverage gaps
Creating a dedicated healthcare reserve fund separate from general retirement savings provides financial security
Creating a retirement income plan may substantially improve your readiness for healthcare costs in retirement.
Table of Contents
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Understanding the True Cost of Healthcare in Retirement
The cost of health increases significantly as people age, making it crucial to factor these expenses into retirement planning.
Healthcare costs in retirement extend far beyond monthly Medicare premiums. The average retiree spends approximately $4,500 to $6,500 annually on healthcare, but this figure can vary dramatically based on your health status and coverage choices.
Consider the components of healthcare spending in retirement. Health care spending is a significant and variable component of retirement costs, especially when accounting for Medicare expenses such as premiums, co-payments, deductibles, and the potential for unforeseen health-related expenses that can impact your overall retirement budget.
Medicare Part B premiums alone cost most retirees $164.60 per month in 2024, with high-income earners paying up to $594 monthly due to income-related monthly adjustment amounts (IRMAA).
Prescription drug costs add another layer of expense. Even with Medicare Part D coverage, the average retiree spends $1,500 to $2,000 annually on medications. Those with chronic conditions requiring speciality drugs may face costs exceeding $10,000 annually.
Pro Tip: Track your current healthcare spending for 12 months before retirement to establish a baseline. Most people underestimate their actual healthcare costs by 20-30%.
Out-of-pocket expenses often surprise new retirees.
Medicare’s deductibles, co-payments, and coinsurance can add up quickly and may vary based on the specific health plan you choose and your individual circumstances. For example, a hospital stay under Medicare Part A includes a $1,676 deductible per benefit period in 2025 , plus daily coinsurance after 60 days.
Dental, vision, and hearing care represent significant uncovered expenses. These services, not covered by Original Medicare, average $2,000 to $3,000 annually for routine care, with major procedures like dental implants or hearing aids costing thousands more.
It’s a common misconception that Medicare covers dental, vision, and hearing. In reality, these services often require separate coverage.
In addition to these, retirees should be prepared for potential costs and other costs that may arise due to inflation, advanced treatments, or unexpected medical needs.
Medicare Basics: What's Covered and What's Not
Understanding Medicare’s structure is fundamental to planning for healthcare costs in retirement. Medicare consists of several parts
Part A (hospital insurance)
Part B (medical insurance)
Part C (Medicare Advantage)
Part D (prescription drug coverage).
Each part functions differently, covering specific services with varying costs and coverage gaps. Choosing the right plan or combination of plans is essential for meeting your healthcare needs in retirement.
Medicare Part A covers hospital insurance, including inpatient care, skilled nursing facility care, hospice, and some home healthcare. Most people pay no premium for Part A if they’ve worked and paid Medicare taxes for at least 10 years.
Part B covers medical insurance, including doctor visits, outpatient care, preventive services, and medical equipment. The standard monthly premium for 2025 is $185.00, but some beneficiaries pay a higher premium due to income-related adjustments.
Part D provides prescription drug coverage through private insurance plans. Premiums vary by plan but average $3 to $128 monthly. When comparing plans, consider annual premiums as a key factor in estimating your total healthcare expenses.
Medicare Advantage (Part C) plans offer an alternative to Original Medicare, combining Parts A, B, and usually D into one plan. These plans often include additional benefits like dental and vision but may restrict your choice of healthcare providers.
When you become eligible, it’s important to know when to join Medicare to avoid penalties and gaps in coverage. Understanding enrollment periods and the implications for your plan choices is crucial for a smooth transition into retirement healthcare.
Supplemental Insurance Options
Medigap policies fill many of the coverage gaps in Original Medicare. These standardized plans, labeled A through N, are offered by private insurance companies and help cover costs not paid by Medicare. They offer different levels of coverage for deductibles, co-payments, and coinsurance, and can help pay for co-pays as well.
Plan G, the most comprehensive option available to new enrollees, covers virtually all Medicare cost-sharing except the Part B deductible. Monthly premiums range from $118 to $279, depending on your location and insurance company.
Choosing between Original Medicare with Medigap and Medicare Advantage requires careful consideration. Out of pocket costs are a key factor—Original Medicare with Medigap offers maximum flexibility in choosing healthcare providers but costs more upfront. Medicare Advantage plans typically have lower premiums but may limit your provider network.
Pro Tip: Enroll in Medigap during your six-month open enrollment period starting when you turn 65 and enroll in Part B. During this time, insurers cannot deny coverage or charge higher premiums based on pre-existing conditions.
Consider your health status and travel plans when selecting supplemental coverage. Frequent travelers often prefer Original Medicare with Medigap for nationwide coverage, while those who primarily stay local might find Medicare Advantage more economical.
Tax-Advantaged Healthcare Savings Strategies
A health savings account (HSA) is a powerful investment vehicle for future healthcare expenses, offering the ultimate triple tax advantage for healthcare planning. To contribute to an HSA, you must be enrolled in a high deductible health plan.
Contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses can be withdrawn tax free.
For 2025, individuals can contribute $4,300 to a health savings account, with an additional $1,000 catch-up contribution for those 55 and older. Families can contribute $8,550 plus the catch-up amount. These funds can be invested and grow tax-free for decades. Payroll deductions can be used to fund HSAs during your working years, making it easy to save consistently.
Unlike Flexible Spending Accounts (FSAs), HSA funds roll over year to year with no expiration. After age 65, you can withdraw HSA funds for non-medical expenses without penalty, though you’ll pay income tax on non-qualified withdrawals.
Strategic HSA planning involves maximizing contributions during your working years and allowing the funds to grow untapped if possible. By paying current medical expenses out of pocket and saving receipts, you can reimburse yourself tax-free years later when healthcare costs are higher.
“We encourage clients to think of their HSA as a specialized retirement account specifically for healthcare,” notes Megan Waters, CFP® at Covenant Wealth Advisors.
“It’s often more valuable than additional 401(k) contributions once you’ve received your employer match. Taking advantage of the tax benefits and growth potential of HSAs can significantly improve your retirement healthcare planning.”
Long-Term Care Planning
Long-term care represents the largest unfunded healthcare liability for most retirees.
With 70% of people over 65 requiring some form of long-term care, and costs averaging $5,000 to $10,000 monthly and often times more, this expense can devastate even substantial retirement portfolios.
Nursing home care, especially for a private room, can be particularly expensive, often exceeding these averages. Long-term care insurance can help cover the high costs of nursing home stays, including private room accommodations, making it an important consideration in comprehensive retirement planning.
Traditional long-term care insurance provides dedicated coverage but comes with escalating premiums and the risk of paying for coverage you might never use. Hybrid life insurance policies with long-term care riders offer an alternative, providing death benefits if care isn’t needed.
Self-insuring requires substantial assets – we generally see clients self insuring when they have $2 million in investable assets or more. This strategy works for high-net-worth individuals who can absorb potential care costs without jeopardizing their retirement lifestyle.
Pro Tip: Consider long-term care insurance in your 50s when premiums are more affordable and you’re more likely to qualify medically. Waiting until your 60s can double or triple the cost.
Asset protection strategies become crucial for long-term care planning. Certain trusts and asset transfers can help preserve wealth while potentially qualifying for Medicaid, though these strategies require careful planning with qualified professionals.
Creating Your Healthcare Budget
Building a realistic healthcare budget requires analyzing both predictable and unpredictable health care expenses. Start with fixed costs like Medicare premiums, supplemental insurance, and regular prescriptions.
Factor in variable health care expenses including deductibles, co-payments, and over-the-counter medications. Historical data suggests budgeting 20% above your estimated costs to account for unexpected medical events. It is crucial to plan ahead to ensure you have sufficient funds set aside for rising healthcare costs in retirement.
Consider healthcare inflation in your projections. While general inflation might average 2-3%, healthcare costs typically rise 3-5% annually. A healthcare expense of $6,000 today could exceed $10,000 in ten years. Preparing for future health care expenses is essential—strategies such as utilizing Health Savings Accounts and maintaining tax-efficient savings can help cover these increasing costs over time.
At Covenant Wealth Advisors, we often recommend creating cash flow projections that include healthcare costs for each spouse in a relationship. Costs can very across individuals based on your health and your life expectancy.
Managing Healthcare Costs in Early Retirement
Retiring before Medicare eligibility at 65 presents unique challenges. Early retirees must carefully evaluate health insurance options to bridge the gap until Medicare. Private health insurance for early retirees can cost $621 to $1,319 monthly per person, with high deductibles and limited networks. Your retirement age will directly impact your healthcare costs and eligibility for different insurance options, so it’s important to plan accordingly.
COBRA continuation coverage offers 18 months of employer plan access but at full cost plus a 2% administrative fee. This temporary solution often costs $500 to $1,500 monthly but maintains your current coverage and provider network. In some cases, employer offers such as retiree health benefits or health savings accounts (HSAs) may be available, providing additional ways to manage healthcare expenses before Medicare.
Affordable Care Act (ACA) marketplace plans provide another option, with potential premium tax credits based on income. Strategic income and tax planning in early retirement can maximize these subsidies, potentially reducing premiums by 50% or more. It’s crucial to maintain medical coverage until you become eligible for Medicare to avoid gaps in care and unexpected expenses.
At Covenant, we like to create a game plan before you retire, if possible.
Health sharing ministries offer an alternative for some early retirees, though these aren’t insurance and don’t guarantee coverage. These faith-based programs typically cost less than traditional insurance but come with coverage limitations and eligibility requirements.
Estate Planning Considerations
Healthcare costs significantly impact estate planning strategies. Medical expenses in the final years of life can consume substantial assets, potentially reducing inheritances and charitable bequests.
Proper beneficiary designations on HSAs ensure tax-free transfers to surviving spouses. Non-spouse beneficiaries must withdraw HSA funds within 10 years, paying income tax on the distributions.
Consider how healthcare costs affect your legacy goals. Long-term care expenses averaging more than $100,000 annually can quickly deplete estates, making insurance or asset protection strategies essential for wealth preservation.
Power of attorney documents and healthcare directives become crucial as healthcare needs increase. These documents ensure trusted individuals can make medical and financial decisions if you become incapacitated, potentially avoiding costly court proceedings.
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Retirement Income Planning - Find when you can retire and if you'll be able to maintain your lifestyle.
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Tax Planning for Retirement - Identify tax strategies including Roth conversions, RMD management, charitable giving and more...
FAQ Section
Q: When should I enroll in Medicare? A: Enroll during your Initial Enrollment Period, which begins three months before your 65th birthday month and extends three months after. Delaying enrollment can result in permanent premium penalties unless you have qualifying employer coverage. Contact Social Security three months before turning 65 to begin the process. Make sure your retirement plans align with your Medicare enrollment timing and coverage choices.
Q: How much should I budget for healthcare costs in retirement? A: Plan for $5,000 to $7,000 annually per person in today’s dollars for comprehensive coverage including Medicare, supplemental insurance, and out-of-pocket expenses. Couples should budget $10,000 to $14,000 annually, adjusting upward for inflation. Consider adding 20-30% to these estimates if you have chronic health conditions. Keep in mind that a significant portion of your social security benefits may be allocated to medical expenses.
Q: Is long-term care insurance worth the cost? A: Long-term care insurance may make sense if you have assets between $500,000 and $2 million that you want to protect. Below this range, you might qualify for Medicaid; above it, you might self-insure. The younger and healthier you are when purchasing, the more affordable and valuable the coverage becomes.
Q: Can I use my 401(k) to pay for healthcare expenses? A: Yes, but withdrawals are subject to income tax and potentially increase your Medicare premiums through IRMAA. HSA funds are more tax-efficient for healthcare expenses. Consider using 401(k) funds for general living expenses while preserving HSA funds specifically for healthcare costs. When planning for healthcare expenses, it's important to consider all your retirement income sources.
Q: How do I choose between Original Medicare and Medicare Advantage? A: Original Medicare with Medigap offers maximum provider flexibility and predictable costs but higher premiums. Medicare Advantage plans cost less upfront but may restrict your provider choices and have higher out-of-pocket maximums. Consider your health status, travel habits, and preferred doctors when deciding, and tailor your choice to your personal situation, including your health needs and lifestyle.
Conclusion
Planning for healthcare costs in retirement requires more than hoping Medicare will cover everything. As we've explored, retirees face significant expenses from Medicare premiums, supplemental coverage, prescription drugs, and services Medicare doesn't cover.
By understanding these costs and implementing smart strategies like maximizing HSA contributions, choosing appropriate supplemental coverage, and planning for long-term care needs, you can protect your retirement assets while ensuring access to quality healthcare.
The key is starting early – the sooner you begin planning for healthcare costs in retirement, the more options you'll have and the better prepared you'll be for whatever health challenges arise. Don't let healthcare costs derail your retirement dreams; take action today to secure your financial future and health security.
Would you like our team to just do your retirement planning for you? Contact us today for a free retirement roadmap experience.
About the author:
Senior Financial Advisor
Adam is a Senior Financial Advisor with Covenant Wealth Advisors and a CERTIFIED FINANCIAL PLANNER™ practitioner. He has over 17 years of experience in the financial services industry in the areas of financial planning for retirement, tax planning, and investment management.
Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond, Reston, and Williamsburg, VA. Registration of an investment advisor does not imply a certain level of skill or training. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. This article was written and edited by a CERTIFIED FINANCIAL PLANNER™ professional with the assistance of AI. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.
