Retirement is supposed to be a time to relax and enjoy life’s simple pleasures. However, the reality of retirement often includes a significant increase in healthcare costs, which can be a source of anxiety and stress for many retirees.
You don’t have to face this challenge alone, though. By planning ahead and using the right strategies, you can avoid the complexities of healthcare expenses.
1. Understanding the Scope of the Challenge
First things first — let’s take a closer look at the costs of healthcare in retirement.
A 65-year-old individual would need around $165,000 in after-tax savings to cover their healthcare expenses, based on Fidelity’s 2024 Retiree Health Care Cost Estimate. Yikes! An additional study indicates that a 55-year-old couple may have to pay over a million dollars in healthcare costs during retirement.
Among these estimates are premiums, out-of-pocket costs, and even long-term care. But, you need to remember that these are only estimates and may vary significantly depending on several factors:
- Age. Inevitably, our healthcare needs rise with age.
- Location. Across the nation, living costs and healthcare costs differ significantly.
- Health status. It is possible to incur substantial healthcare costs due to chronic conditions or unexpected illnesses.
2. Maximize Medicare Benefits: Navigating the Maze
Among retirees, Medicare is a cornerstone of their healthcare coverage. Nonetheless, understanding it can feel like a maze at times. So, let’s break this down.
The original Medicare plan, which includes Parts A and B, covers a portion of hospital stays and doctor visits. Unfortunately, it does not cover everything. What about vision, hearing, and dental care? Nope. Prescription drugs? They’re omitted. As a general rule, you may want to consider supplemental insurance. If you travel outside the U.S. and need medical care, it’s up to you.
Obviously, that makes Medicare benefits a bit tricky. Therefore, it might be a good idea to add a few extra layers of protection, such as;
- Medigap. You can think of this as a supplemental insurance plan. It covers out-of-pocket costs that Original Medicare doesn’t, like deductibles and copayments.
- Medicare Part D. This plan covers prescription drugs.
- Medicare Advantage (Part C). Basically, this is an all-in-one package offered by private insurance companies. You can combine many benefits of Parts A and B, including prescription drug coverage, but you are usually restricted to a network of doctors and hospitals.
The cost of Medicare coverage.
In 2025, Medicare Part A deductibles will be $1,676 per year, and Part B deductibles will be $257. Compared to 2024, this is an increase of $240.
The deductible for Medicare Part D will be $590 in 2025, up from $545 in 2024.
What if I retire before I’m 65?
Medicare is usually available to people over 65, but if you retire before then, you’ll have to find other ways to cover your healthcare costs. A few options are listed below;
- Join your spouse’s plan. It may be possible for you to join the health insurance plan of your spouse’s employer if he or she is still employed.
- COBRA. You can continue your employer’s health insurance coverage for a limited time, usually up to 18 months. But this costs a boatload.
- Purchase individual health insurance. Insurance plans can be purchased directly from an insurance company, through a broker, or on a government-managed health insurance exchange.
- Consider a high-deductible health plan. The monthly premiums are lower in these plans, but the deductibles are higher. You may be qualified to open a Health Savings Account (HSA), which can be helpful in saving for future medical costs.
Medicare can be tricky to navigate, so it’s essential to research before making any decisions. It is important to compare plans carefully, consider your budget, and remember that your healthcare needs may change with time.
3. Build a Health Savings Account
Have you ever heard of an HSA? It’s worth checking out if you have a high-deductible health plan. You can think of it as a super-powered savings account for healthcare expenses.
- Triple tax advantage:
- Contribute tax-free. In most cases, HSA contributions are tax-deductible.
- Grow tax-free. The money you earn in the account grows tax-free.
- Withdraw tax-free. You do not pay taxes on withdrawals when you use the money for qualified medical expenses.
- Flexibility. There is a lot of flexibility with HSAs. The funds can be used for a variety of medical expenses, including;
- Doctor visits
- Prescriptions
- Dental and vision care
- With your doctor’s approval, you can even get acupuncture and prescription medications over-the-counter.
- Long-term savings. The best part? HSA funds that are unused can be rolled over year after year. The benefit of this is that it can be used to save for future healthcare expenses, like long-term care.
Keep in mind that you can only contribute so much to your HSA each year. For 2025, the self-only coverage limit is $4,300, and the family coverage limit is $8,550. A catch-up contribution of $1,000 is available to those 55 and older.
4. Long-Term Care Insurance: A Crucial Consideration
The cost of long-term care can be incredibly high, and Medicare does not cover most long-term care services. But, in addition to assisted living and nursing home care, long-term care insurance can cover in-home care as well.
At the same time, long-term care insurance premiums can be pricey. So you need to weigh the cost versus the benefit carefully.
Alternatively, you can purchase a deferred long-term care annuity.
It is possible to buy them after you retire, usually up to the age of 85. The way they work is similar to how insurance works. As soon as you need long-term care, the annuity pays you a monthly income to cover those costs.
However, this income is meant to pay for long-term care expenses, such as nursing homes, assisted living, and home care. It cannot be used for groceries or vacations.
Another option is to add a long-term care rider to a fixed annuity or an indexed annuity. As a result, you could potentially cover both everyday expenses and long-term care expenses.
5. Create a Realistic Healthcare Budget
In order to plan financially for healthcare expenses, you need to create a budget. Here are some factors to consider;
- Premiums. Include all your insurance premiums, such as Medicare, Medigap, Part D, etc..
- Out-of-pocket costs. Be sure to account for co-pays, deductibles, and any other expenses that are not covered by your insurance.
- Unexpected costs. Prepare for unexpected medical emergencies by setting aside a contingency fund.
6. Prioritize a Healthy Lifestyle
There is no substitute for prevention. You can significantly reduce your risk of chronic diseases and the associated medical expenses by maintaining a healthy lifestyle.
- Regular exercise. Get moving! Physical and mental health depend on exercise.
- Balanced diet. Ensure you nourish your body with a healthy diet of fruits, vegetables, and whole grains.
- Routine check-ups. Regular doctor’s appointments should be kept as a preventative measure.
- Stress management. Spend time in nature, practice yoga, or meditate to manage stress.
7. Explore Additional Coverage Options
Besides Medicare, you may want to explore the following options;
- Employer-sponsored retiree health plans. Some employers may offer retirees health insurance. Even some part-time jobs provide health insurance.
- Medicaid. In addition to providing coverage for low-income individuals, this program may also help with long-term care costs.
- Veterans’ benefits. You may be eligible for Veterans Administration (VA) healthcare benefits.
8. Work with a Financial Planner
There are many benefits to working with a financial planner. They can help you;
- Provide cost projections. Provide you with an estimate of your future healthcare costs.
- Recommend savings strategies. Create a healthcare savings plan that meets your needs.
- Advise on insurance options. Provide you with the most appropriate insurance coverage.
9. Stay Informed
The healthcare system is constantly evolving, and so are policies and costs. As such, keep up-to-date on:
- Medicare rules. Be aware of changes in premiums, deductibles, and coverage. Get all the info you need on Medicare.gov, the official Medicare website
- Tax laws. Make sure you understand how the tax law affects your deductions for medical expenses and HSA contributions.
- Healthcare legislation. Become familiar with any potential reforms that might affect retirees.
10. Start Planning Early
Preparation is key, so begin planning as early as possible.
- Assess your current savings. Assess whether your current savings are sufficient to cover your projected healthcare costs.
- Adjust your investments. Invest in a portfolio that aligns with your long-term healthcare goals.
- Educate yourself. Stay up-to-date on Medicare, long-term care, and other relevant topics.
Conclusion
Planning for healthcare costs is crucial to maintaining a comfortable and secure retirement. By understanding your potential expenses, maximizing your benefits, and actively approaching your health, you can navigate healthcare complexities and enjoy a fulfilling retirement. Remember, it’s never too early to start planning.
*Disclaimer: Please note that this information is provided for general guidance only and is not intended to be used as legal or financial advice.
FAQs
How much will healthcare cost me in retirement?
The amount varies greatly. Several factors affect your insurance coverage, including your age, medical conditions, lifestyle decisions, and the type of coverage you opt for.
In any case, you may want to consider these estimates;
- Fidelity Retiree Health Care Cost Estimate. This annual report aims to provide estimates of healthcare costs for retirees.
- Consult with a financial advisor. You can get personalized estimates from them based on your individual situation.
What does Medicare cover?
- Medicare provides health insurance to people aged 65 and older.
- Part A: Included in this plan are hospital stays, skilled nursing facility care, hospice care, and home health care.
- Part B: Provides coverage for doctor’s visits, outpatient care, medical equipment, and preventive services.
- Part C (Medicare Advantage): This private plan combines Part A, Part B, and often Part D (prescription drug coverage) into one plan.
- Part D: Covers prescription drugs.
What are the gaps in Medicare coverage?
The Medicare program does not cover everything, such as;
- Long-term care. The cost of nursing home care assisted living, and in-home care is typically not fully covered.
- Dental care. In most cases, dental services are not covered
- Vision care. Almost all eye exams and eyeglasses aren’t covered
- Hearing aids. In general, hearing aids are not covered.
How can I supplement Medicare?
- Medicare Supplement Insurance (Medigap). Provides coverage for costs not covered by Original Medicare (Parts A and B).
- Medicare Advantage Plans. In addition to Original Medicare, they offer prescription drug coverage, vision, dental coverage, and hearing.
- Long-term care insurance. Contributes to the cost of long-term care services
- Health Savings Account (HSA) or Flexible Spending Account (FSA). Suitable for paying qualified medical expenses.
How can I reduce my healthcare costs in retirement?
- Maintain a healthy lifestyle. You can reduce your risk of chronic diseases by exercising, eating a balanced diet, and avoiding smoking.
- Take advantage of preventive care. It is essential to have regular checkups and screenings to detect and prevent health problems.
- Shop around for the best prices. Get a comparison of medication prices, medical procedures, and healthcare providers.
- Consider using generic medications. Often, they are less expensive than brand-name medications.
- Explore telehealth options. An appointment through telehealth can be convenient and cost-effective for patients seeking care from a doctor.
When should I start planning for healthcare costs in retirement?
- The sooner, the better. Don’t wait until the last minute to plan to ensure you have adequate coverage and financial resources.
- Review your coverage regularly. As your healthcare needs change, so may your coverage options over time.
Image Credit: Matthias Zomer; Pexels
