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You’ll Need This Much Money to Cover Health Care Costs in Retirement

Paying for health care in retirement is no holiday. Get a fix on the total number, and take some steps toward covering medical costs in your golden years.

Written by Brian O'Connell | Devon Delfino / September 7, 2022

  • While individual costs vary, the average couple in retirement can expect to pay about $315,000 for health care costs.
  • Medicare can help seniors with health care costs, but coverage depends on which plan you choose, as Medicare offers different options, with different features and costs.
  • Focusing on staying healthy now can help you avoid preventable costs, or minimize costs through early detection.

Financial experts frequently talk about how much money you need to retire comfortably.

That’s all well and good. After all, having a target, long-term savings number can help Americans grasp the urgency of having enough cash in retirement.

But there’s another number that future retirees need to know about—the amount of cash needed to cover health care costs. It’s a number that doesn’t get enough oxygen, but it’s a critical number, nonetheless.

It’s also a bigger figure than you might think. A study by Fidelity Investments pegs the average cost of health care in retirement for a couple at $300,000, up from $160,000 about 20 years ago.[1] The total amount needed depends on a variety of factors, including when and where you retire, your health status and your likely life expectancy.

Understanding your own health care needs, as well as the options available to you, is critical if you’re going to save enough money to cover those costs. Here’s what you need to know to get it done.

Rising health care costs are a big issue

Unfortunately for Main Street Americans, saving enough money to cover potentially hundreds of thousands of dollars in retirement isn’t a luxury—it’s a necessity.

“Medical prices have been rising quicker than the overall inflation rate,” says Lyle Solomon, an attorney at Oak View Law Group in Rocklin, Calif. “As a result, health insurance and various medical-related expenses are expected to increase dramatically after retirement.”

In fact, over the next decade, health care costs are predicted to increase by an average of 5.5% per year, reaching $6 trillion by 2027, according to the Centers for Medicare & Medicaid Service.[2] Here are some other key health care cost figures to know[3]:

Total medical costs for the average American couple (65-year-old retirees) Forecasted medical spending for single retirees in 2021
$315,000$157,000 (women), $143,000 (men)

The average cost for the average American retiree couple divides down as follows, according to CMS numbers.

  • 39%: Generic, branded and specialty drugs

  • 18%: Premiums towards Medicare Part B and Part D (for doctor appointments and prescribed drugs)

  • 43%: Other medical expenses (including copays, coinsurance and deductibles for doctor and hospital charges)

“These costs are based on the assumption that the couple is eligible for Original Medicare [Medicare Parts A and B] and does not have an employer-sponsored retiree health plan,” Solomon says. “You might invest less than $300,000, but you could also spend a lot more.”

5 steps to mitigate health care costs in retirement

Handling the high costs of health care in retirement takes preparation and discipline. Financial experts well-versed in health care costs advise taking these four steps to cover costs.

1. Know your cost targets

Job one for retirees and pre-retirees is to know what you’re up against, cost-wise.

“Basically, there are three areas of health care costs you need to cover health care premiums, out-of-pocket expenses, and long-term care,” says Jay Zigmont, a Certified Financial Planner and the founder of Mississippi-based Live, Learn, Plan, a financial planning firm.

  1. Premiums: Your policy’s premium, which is your monthly cost of being insured, will be a major factor when it comes to your health care costs in retirement. For context, Medicare Part A can come with a $0 premium, but part B’s depends on your income.[4]

  2. Out-of-pocket expenses: This is the direct and 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 non-covered expenses.[5]

  3. Long-term care: Long-term care alone can account for a huge chunk of overall retirement health care costs (and it’s important to note that the $315,000 figure mentioned above doesn’t account for long-term care).[3] This kind of care includes services like staying in a nursing home, and in-home nursing with a medical attendant. According to GenWorth, which tracks annual consumer long-term care spending, just one year in a private nursing home room would cost over $108,000 in 2021.[6] If you don’t have a plan for those costs, they can easily put a wrench in your planned retirement spending plan.

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

“If you choose a lower premium plan, you are effectively gambling that you are going to stay healthy,” Zigmont says. “Lower premiums come with higher out-of-pocket costs and maximums.”

The challenge is that a major medical event such as a stroke or heart attack can easily trigger a six-figure bill, while cancer costs run even higher.  

“Your health insurance will protect you for covered expenses [and have a maximum out-of-pocket expenditure], but it becomes a challenge when you need specialized care that is not covered,” Zigmont says. “You want to have the flexibility and the ability to afford the best care possible when your health is at risk.

And on that note, it seems that many retirees’ plans fall short. For example, retirees are often surprised that Medicare—and most health care insurance plans—doesn’t cover long-term care (such as in a skilled nursing facility). So those costs can prove an unexpected hit to a retiree’s savings fund. Unfortunately, the cost of long-term care continues to rise.[7]

Averages for 2022Female patientsMale patients
Length of long-term care3.7 years2.2 years
Cost of long-term care$401,109$238,497

“Keep in mind those numbers are in today's numbers, and with inflation, those numbers are going way up,” Zigmont adds.

2. Get acquainted with Medicare

No doubt, Medicare can play a big role in retirement and future recipients should get familiar with it.

“The financial role that Medicare plays in retirement depends on what parts of Medicare you enroll in,” says Lindsay Malzone, the Medicare expert at Medigap.com, a plans comparison platform. “As long as you pay 40 quarters [or 10 years] of Medicare taxes, Part A is premium free.”

There’s a caveat, however, as Part A only covers hospital coverage.

“For your doctor coverage or inpatient coverage, you'll need to enroll in Part B,” Malzone says. “Part B does have a monthly premium that increases year over year. Currently [in 2022], the premium is $170.10.”

Both Part A & Part B also have deductibles and coinsurance. 

There are also other options, like Medigap or Medicare Supplemental Insurance, which can help fill coverage gaps from Plans A and B. Both Medigap and Medicare Advantage plans are available from private health insurance plans and they can help pay your share of health care costs. You have to buy and pay for Medigap on your own.[8]

“Beneficiaries can choose to either enroll in Medigap or Medicare Advantage to supplement their Original Medicare [Part A & Part B] coverage,” Malzone adds. “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. However, it's a pay-as-you-go type plan… as you use the benefits, you can expect high out-of-pocket costs as well as limitations on networks and coverage areas.”

Additionally, Medicare Advantage plans often come with prescription coverage. 

“If you enroll in Medigap, you'll need to enroll in a stand-alone Part D prescription drug plan,” Malzone says. “If you go with a Medigap plan, you can expect premiums anywhere between $50 and $350, depending on the letter plan you choose."

Reset

"If you delay enrolling into Medicare and have no other form of creditable coverage, you will be penalized in the form of higher health care costs and less retirement savings,” Zigmont adds. “Those penalties will stick with you for the rest of your life." In other words, if you can plan ahead to get $0 premiums on Part A, that can save you cash down the road.

Here’s an overview of the main Medicare plans we’ve mentioned[4, 9-15]:

Medicare planDefinitionPremiumKeep in mind
Part A It covers inpatient hospital stays, care in a skilled nursing facility, hospice care and some home health care Can be $0 You have to pay 40 quarters of Medicare taxes to qualify for the $0 premium, and there’s no out-of-pocket maximum unless you also get supplemental coverage (like Medigap) or you get Medicare Advantage
Part B Provides coverage for certain doctors' services, outpatient care, medical supplies and preventive services Starts at $170 per month The premium is based on your income, so higher-income consumers will pay more
Medigap Supplemental insurance for Medicare sold by private companies; it can help with costs like ​​deductibles, coinsurance and copayments Depends on the plan you get (average: $150 per month) You must have Medicare Part A and Part B to qualify
Medicare Advantage A Medicare-approved plan from a private insurer; these bundled plans can include Part A, B and D (prescription drug coverage) Varies, depending on your plan (average: $19 per month) Premiums can change each year; you must have Medicare Part B to qualify; some plans are free
Part D This helps cover the cost of prescription drugs, including things like vaccines Varies (average: $32.08 per month, as of 2022) Premiums can change each year, and if you don’t enroll when you’re first eligible, you might pay a late enrollment penalty that can last as long as you have Part D

3. Know your best coverage-gap options

In addition to options like Medigap or Medicare Advantage, you may consider getting additional insurance coverage from a private company. However, private insurance is generally more expensive than Medicare, especially when it comes to out-of-pocket costs. Consider the dollar figures below[4, 16-17]:

Average private, bronze-level plan (combined medical and prescription drug coverage) Medicare Part A Medicare Part B Medicare Part D
Deductible$7,050$1,556$233Can be as low as $0, and max out at $480 for 2022

If you’re someone who has a decent amount of annual medical costs, a private insurance plan might require way more out of pocket cost than Medicare plans (even combined) might.

 Still, you’ll need to have a plan for both expected health care costs as well as long-term care, which isn’t typically included in a regular health insurance policy—nor is it covered by Medicare if that’s the only care you need.[18]

So, you may want to consider long-term care insurance in addition to your health insurance policy. It’s worth noting that some permanent life insurance policies offer living benefits, which may cover long-term care costs while decreasing the death benefit.

Tip

“If you choose a lower premium for any health insurance in retirement, you need to make sure you have enough in your emergency fund to pay for any out-of-pocket costs,” says Zigmont.

4. Leverage a tax-free health savings account

If you currently have a high-deductible health plan (HDHP), you may also be able to leverage a Health Savings Account (HSA) account. 

HSAs can help future retirees with health care costs in retirement by saving pretax dollars, which can be fortified by employer contributions. These funds have the potential to grow and be taken out tax-free for federal and state tax purposes when deployed for qualified medical expenses.

“HSAs are great because they are triple tax-free,” Zigmont says. “You don’t pay taxes on what you put in, it grows tax-free and comes out tax-free as long as you spend the money on health care costs.”

There are other health savings options for those who don’t have an HDHP: Flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs). Unfortunately, these must be available from your employer, so they typically don’t work in retirement. (Although, if your employer offers a retirement HRA, you can use those funds in retirement— and those accounts are employer-funded.[19]) 

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Tip

"Always plan for what your future health will be, not what it currently is,” Zigmont adds. “Don't automatically choose the cheaper route because you're currently healthy. Don't delay coverage because you don't go to the doctors' office now, or because you don't have prescription medications now.” 

5. Get regular checkups to get ahead of health issues

You can’t control everything about your health, but you can see where you’re at and make changes based on that information. So doing things like scheduling an annual checkup, participating in illness screenings and trying to maintain a healthy lifestyle can be great tools to help you understand your health risks, make targeted improvements and potentially fend off illnesses. 

For example, if lifestyle changes can help you avoid developing a chronic illness, you may be able to avoid the costs that come along with that diagnosis, like prescriptions, treatment costs and doctor’s visits.

In other words, if you focus on prevention (and early detection), you’ll be more likely to stay healthy longer, and thereby lower your long-term health care costs—not to mention the impact on your quality of life. So it’s well worth having a conversation with your doctor about your health as you age, and following their instructions should something pop up. 

Health care costs for retirees can be daunting—especially when you look at the raw statistics. But with a combination of planning savvy and health maintenance, you’ll be better prepared to face your gold years with confidence. That way, you can focus on the things that really matter, like enjoying your retirement.

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Article Sources
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  2. “National Health Expenditure Projections 2018-2027,” Centers for Medicare & Medicaid Services, https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/ForecastSummary.pdf.
  3. “Planning for Health Care Costs in Retirement,” Fidelity Investments, https://institutional.fidelity.com/app/item/RD_13569_42402/retirement-planning-health-care-costs.html.
  4. “Costs,” Medicare.gov, https://www.medicare.gov/basics/costs/medicare-costs.
  5. “What is an Out-of-Pocket Maximum and How Does it Work?” Cigna, https://www.cigna.com/knowledge-center/what-is-an-out-of-pocket-maximum.
  6. “Cost of Care Survey,” Genworth, June 2, 2022, https://www.genworth.com/aging-and-you/finances/cost-of-care.html.
  7. “Cost of Long Term Care By State,” Acacia Insurance Services, https://www.ltcinsuranceconsultants.com/cost-of-long-term-care/.
  8. "Are Medigap and Medicare Supplemental Insurance the same thing?" AARP, https://www.aarp.org/health/medicare-qa-tool/is-medigap-same-as-medicare-supplemental-insurance/.
  9. “What's Medicare?” Medicare.gov, https://www.medicare.gov/what-medicare-covers/your-medicare-coverage-choices/whats-medicare.
  10. “What's Medicare Supplement Insurance (Medigap)?” Medicare.gov, https://www.medicare.gov/supplements-other-insurance/whats-medicare-supplement-insurance-medigap.
  11. Rachel Christian, “Medicare Supplemental Insurance (Medigap) Costs,” RetireGuide, Aug. 23, 2022, https://www.retireguide.com/medicare/supplement-insurance/costs/.
  12. Alana Biggers, M.D., “Medicare Advantage: Monthly costs and more,” Medical News Today, Nov. 15, 2021, https://www.medicalnewstoday.com/articles/how-much-does-medicare-advantage-cost-per-month.
  13. “CMS Releases 2023 Projected Medicare Basic Part D Average Premium,” Centers for Medicare & Medicaid Services, July 29, 2022, https://www.cms.gov/newsroom/news-alert/cms-releases-2023-projected-medicare-basic-part-d-average-premium.
  14. “Is Medicare Advantage really free? Monthly plan premium explained,” Humana, https://www.humana.com/medicare/medicare-resources/is-medicare-advantage-free.
  15. “How to get prescription drug coverage,” Medicare.gov, https://www.medicare.gov/drug-coverage-part-d/how-to-get-prescription-drug-coverage.
  16. “Cost-Sharing for Plans Offered in the Federal Marketplace, 2014-2022,” Kaiser Family Foundation, March 21, 2022, https://www.kff.org/slideshow/cost-sharing-for-plans-offered-in-the-federal-marketplace/.
  17. “Yearly deductible for drug plans,” Medicare.gov, https://www.medicare.gov/drug-coverage-part-d/costs-for-medicare-drug-coverage/yearly-deductible-for-drug-plans.
  18. “Long-term care,” Medicare.gov, https://www.medicare.gov/coverage/long-term-care.
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About the Authors

Brian O'Connell

Brian O'Connell

A former Wall Street bond trader, Brian O’Connell is the author of two best-selling books; “The 401k Millionaire” and “CNBC’s Creating Wealth”. His bylines include TheStreet.com, Forbes, The Wall Street Journal, U.S. News & World Report, Fox Business, and The Motley Fool, among others.

Full bio
Devon Delfino

Devon Delfino

Devon Delfino is a writer who’s covered personal finance—including everything from student loans to budgeting to saving for retirement and beyond—for the past six years. Her financial reporting has appeared in publications like the L.A. Times, U.S. News and World Report, Teen Vogue, Masha

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