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Cost of Healthcare in Retirement


Healthcare is one of the biggest costs you will face in retirement. In fact, by many estimates, it’s the single biggest cost for retirees. A representative study by Fidelity found that a 65-year-old couple in 2022 will need more than $315,000 to cover their healthcare expenses during retirement. That’s after taxes, so if you’re planning on withdrawing that cash from a 401(k) or another taxable account it will probably mean around $362,000 in overall savings. With that kind of money at stake, planning for your healthcare costs in retirement is essential.

For help planning how you’ll pay for healthcare in retirement, consider working with a financial advisor.

How Costs Will Change

With retirement planning, when it comes to healthcare costs time both is and is not on your side.

The good news is that healthcare costs tend to grow later in life. For most retirees this means that the bulk of their spending will come later in retirement, which gives you additional years to save. Absent individual circumstances, you can usually plan on an extra decade to let your medical savings grow before the costs really begin to accelerate. This means that you don’t necessarily need that entire $362,000 by age 65, though you should be well on your way by then.

The bad news is that healthcare costs are growing quickly overall, sometimes as much as 5% per year. This is particularly bad news if you’re young. For 20-, 30- and even 40-year olds currently saving up for retirement, it’s almost certain that your numbers will be much higher by the time you reach your 60s and 70s. Prepare for that, because if you plan on financing a 2062 retirement based on 2022 numbers you’ll be in for a rough surprise.

Medicare Basics

For most retirees, their single greatest asset will be the Medicare program. This makes it important to understand how this program works and how it can benefit you.

Specifically, as you approach and enter retirement it’s important to understand what Medicare does and does not cover. For example, Medicare Part B covers much of what we consider standard medicine such as outpatient trips to the doctor, medical devices and similar care. While premiums and associated costs have increased for all Medicare services, Part B has gotten particularly more expensive. As you expect to spend more time at the doctor’s office, you should budget that into your spending.

Or consider long-term care needs. Medicare rarely covers long-term care such as assisted living facilities. If you or your doctor think that you might, eventually, need that kind of service, it’s important to begin saving up for it now. You’ll need to cover those expenses yourself, so it’s wise to have the savings well under way.

Individual Insurance Basics

costs of healthcare in retirement

As a corollary to understanding Medicare, it’s important to know if you will need private insurance to supplement the government plan. Many, if not most, retirees rely on Medicare as their only form of health insurance. However, if your needs will significantly outstrip what the Medicare program provides, you may need a private health insurance plan to supplement that coverage. This is something to begin studying early, because the sooner you enroll the better.

As you enter retirement, begin talking with your doctor about your likely long-term needs. Often your doctor can see early warning signs for conditions that won’t emerge until later in life, allowing you to begin planning for those needs today. If you’re going to need supplemental insurance, it’s good to begin searching for it early.

Advantages of HSAs

An HSA, or “Health Savings Account,” is a form of tax-advantaged savings account that focuses on healthcare spending.

It works much like a 401(k) merged with a Roth IRA. Your HSA is an investment portfolio. You can make contributions to this portfolio tax-free up to an annual limit set by the IRS. You can then make withdrawals from this account that are also tax free so long as you spend that money on healthcare and medical costs.

A health savings account can be a fantastic savings vehicle for healthcare spending. The problem is that access to them is extremely limited. In order to qualify for an HSA you need to be enrolled in a qualifying high-deductible health insurance plan. This puts HSA accounts out of reach for current retirees, who are Medicare eligible. It also creates a catch-22 for most other savers. While an HSA is an excellent way to save money for medical expenses, a high-deductible plan is generally a bad idea for all but the particularly young and healthy.

If you’re 25 and have the option, then by all means enroll in a high-deductible plan and bank some money away for the future. For everyone else, if you have the choice to enroll in a better insurance plan you should do so. Then save money for healthcare costs in a standard, full-tax portfolio.

Create a Dedicated Account

Whether or not you can access an HSA, you can still create a dedicated healthcare portfolio.

The IRS offers several different options for retirement investing, from IRAs and 401(k)s even to the relatively rarely known Roth 401(k). Exactly which accounts you qualify for vary based on your employment status. But whether you open a tax-advantaged retirement account or just an earmarked portfolio, you can still build a dedicated pool of healthcare funds.

By separating out your income portfolios from your medical portfolios you can avoid overlapping the two funds. You can look at one section of your finances and specifically plan for what daily life will cost. This is the portfolio you will draw down on every month to replace your income once you stop working. Then you can look at another section of your finances and specifically plan for what healthcare will cost. By keeping the two separate you can track each specific pool of savings and avoid the risk of overestimating your own funds.

Plan to Adjust Your Spending

costs of healthcare in retirement

This is, unfortunately, the other side of planning for healthcare costs in retirement. It’s always wise to earmark lifestyle expenses that you can cut at need. Healthcare is a unique form of spending in that you ultimately have very little flexibility to set your own budget. Biology does not negotiate so, at some point, these costs will become necessary. While you can avoid some quality of life treatments, eventually you will need certain procedures and drugs and that means you will need to spend this money.

Ideally, you will have more than enough money on hand for healthcare spending. But just in case your savings fall short or you get hit with an unexpected expense, it’s worth planning for how you can make cuts elsewhere. If all goes well, this will be a bit of wasted planning. If not, at least you won’t be left scrambling in the face of a steep bill.

The Bottom Line

Healthcare is the single largest cost for many retirees. It’s wise to start planning for that part of your budget early, before you hit retirement. Once you’ve begun your retirement, it’s a good idea to keep monitoring that part of your savings.

Healthcare Tips

  • Let’s keep talking about Medicare. This is one of the most popular, but also most complicated, programs that the government offers. But if you want to plan for healthcare spending in retirement, it’s essential to understand Medicare back to front.
  • A financial advisor can help you plan how you’ll pay for healthcare in retirement. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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