One of the biggest challenges in retirement is paying for health care, and most retirees significantly underestimate how much their health care costs will be. According to Fidelity Investments’ 2024 Retirement Health Care Cost Estimates, Americans are expected to spend about $75,000 on health care in retirement, half of Fidelity’s $165,000 estimate. Not enough.
By the time you retire, inflation will likely increase this number even further. PwC Health Research Institute predicts that the year-over-year trend in health spending in 2025 will be 8%, up 1 percentage point from 7% in 2024.
Of course, a person’s medical expenses are determined by many factors, but active retirement planning and budgeting are essential to ensure that you can pay for unexpected medical expenses if they arise.
Important points
- Medical expenses during retirement can have a significant financial impact, so it’s essential to have a protection plan in place to avoid unexpected expenses.
- Always estimate your medical costs based on your actual circumstances, including your current health and lifestyle choices.
- Tools like Health Savings Accounts (HSAs) and long-term care insurance can help you manage your medical expenses later.
- To reduce the financial impact of unexpected medical events, it is essential to have a contingency plan and have appropriate insurance coverage.
The importance of advance planning
Medicare insurance is available to Americans age 65 and older, assuming they meet certain requirements, such as paying into Social Security, but it doesn’t cover all of their retirement needs, but it does cover some. You must pay the insurance premium. In 2025, monthly premiums for Medicare Part B, which specifically covers doctor visits, will be $185 per month or more, depending on your income.
Future expenses may include out-of-pocket expenses such as co-pays, prescription drugs, home care, and nursing home stays. And none of these costs are cheap. According to Genworth’s latest numbers (2023), a home health aide to help with daily activities can cost $6,292 per month.
Medicare also does not cover medical expenses that could interfere with your retirement income sources, such as:
- dental treatment
- massage therapy
- hearing aid
- glasses or contact lenses
- Home Care or Custody Service Provider
- Private care facility
“Most people are surprised by the high cost of medical care after retirement. They are not aware that medical insurance exists. [Medicare] “Daily life and custodial activities are not covered.” Donna Stephensfounder and principal attorney at Stefans Law Group PC. Stephens has more than 25 years of experience in elder law and retirement income planning. “Unfortunately, most people don’t notice the difference until the bill comes. Those who proactively plan for long-term care costs are staying ahead of the curve.”
Many factors are driving up health care costs in the United States. These include the cost of treating chronic diseases, unhealthy lifestyle choices, and increased prescription drugs (and rising costs).
Additionally, medical insurance inflation is typically higher than general inflation, which means that the price of medical and health care is rising faster than wages and Social Security benefits. According to a study conducted by KFF, these factors can wipe out your assets or force you into bankruptcy when an unexpected medical emergency occurs.
Quick explanation
The Centers for Medicare and Medicaid Services reported that personal health spending for people 65 and older was $22,356 in 2020, the most recent data available.
How to prepare for medical expenses after retirement
Thankfully, there are financial tools available to help cover high medical costs in retirement. Most of them can be used in conjunction with Medicare.
1. Sign up for long-term care insurance
Long-term care insurance (LTC) pays for in-home help with daily tasks, adult day care, and nursing home care, among other senior care services.
Premiums can be high, but without LTC, out-of-pocket care costs could theoretically wipe out your retirement savings. For example, according to the recent Genworth Long Term Care Report, the median annual cost for a home health aide in 2023 (the most recent numbers) was $75,504, and the median cost for a private room in a nursing home was $116,796.
“This cannot be overstated. Long-term care planning is an important part of overall retirement financial planning, as it is the highest and heaviest expense a retiree may experience. ,” Stephens said.
Nursing care insurance premiums vary depending on factors such as age. To understand potential premiums, a couple (both 55 years old) would pay annual premiums of $2,080 for two policies, with an initial benefit of That’s $165,000. $173 per month.
If you are considering purchasing insurance, one strategy is to purchase LTC insurance as a rider when purchasing life insurance so you can get two benefits in one. Like life insurance, the cost of long-term care insurance usually depends on the individual’s health status, amount of coverage, and age at the time of application.
2. Contribute to a health savings account
If you have a high-deductible health plan for insurance, you may be able to open a tax-advantaged health savings account (HSA). This account allows you to make tax-free withdrawals for eligible medical expenses.
HSA funds can be used for home health care, Medicare and long-term care insurance premiums, copays, dental, hearing, vision, and other medical expenses. Funds roll over from year to year, allowing you to accumulate tax-free savings.
important
Once you reach age 65 and are eligible for Medicare, you must stop contributing to your HSA. All the money in your account can be used (tax-free) for qualified medical or health expenses. If you do not use your HSA account before you die, the assets in your account will be transferred to your designated beneficiaries.
In 2025, the annual HSA tax credit contribution limit (employee and employer combined) will be $4,300 for individual coverage and $8,550 for family coverage. If you’re 55 or older, you can make a catch-up contribution of $1,000 a year on top of your maximum HSA limit for that year.
Opening an HSA early in your professional life can save you more time, but if you’re in your 50s and nearing retirement, consider opening an HSA to maximize your contribution limits. There is a need.
3. Purchase Medicare Supplemental Insurance
When you turn 65 and qualify for Social Security benefits, you are automatically enrolled in Medicare. Part A covers hospital stays, and Part B covers doctor visits, tests, x-rays, and ongoing care. Because basic Medicare (Parts A and B) doesn’t cover everything you need, there is supplemental insurance called Medigap.
During this period, you can purchase Medigap insurance from a private insurance company. Medigap’s 6-month annual open enrollment periodare required by law to provide standardized insurance designed to help retirees supplement basic Medicare (Parts A and B). The cost of insurance premiums varies depending on where you live, the insurance company selling your insurance, and the Medigap plan you choose.
caveat
Medigap has requirements, including that it cannot be used if you are enrolled in a Medicare Advantage plan (Part C). It also doesn’t cover prescription drugs, so you’ll need to get a Medicare Prescription Drug Plan (Part D) for prescription drugs or plan to pay out of pocket.
4. Consider health insurance reimbursement system
Health Reimbursement Arrangements (HRAs) are employer-funded group benefits that some employers provide to retired employees. Although less common than other benefits, this plan pays out up to a certain amount each year. HRAs for retirees (also known as post-retirement benefits) allow retired employees to access HRA funds for health and medical expenses, including Medicare and insurance premiums.
Like all retirement plans, the terms and conditions of an HRA vary by employer, but there are no IRS rules regarding annual limits on contributions (unlike an HSA). So if your employer offers an HRA, it can be a great tool in your financial arsenal to cover your health care costs in retirement.
5. Use telemedicine and preventive care options
Many insurance plans cover telehealth visits. These virtual appointments allow you to see a health care professional when you’re feeling unwell without leaving your home. Telemedicine consultations are not just for medical purposes. You can get help and support for weight management, lowering cholesterol, and even chronic health conditions.
Keeping up with primary care physicals, annual exams like mammograms, colon cancer screenings, and vaccinations like the flu are all ways to protect your health and your bottom line.
Keeping up with primary care physicals, annual exams like mammograms, colon cancer screenings, and vaccinations like the flu are all ways to protect your health and your bottom line.
Preventing certain illnesses and illnesses or catching health complications early can potentially save you money in the long run, and telemedicine and preventive care options can help you in your retirement years. It’s a great tool to combat high medical costs.
6. Plan for the unexpected.
Having a contingency plan and having an emergency fund set aside for unexpected medical expenses is another layer of financial protection. TIAA provides at least 6 months (ideally 12 months) worth of expenses in the money market or in the event of a medical or other type of emergency (including coverage for one-time or isolated medical events). We encourage individuals to save in other easily accessible savings accounts.
To plan for potentially “unplanned” expenses, it’s most important to create a financial plan that allows for flexibility but also allows for a guaranteed source of income, he said. Jeffrey MeloneExecutive Wealth Management Advisor at TIAA-CREF. “If you can pair [a financial plan] “Even if you don’t know what the future holds, understanding your care options is the best way to plan for unknown or unpredictable expenses,” he says.
If you don’t plan on long-term care, you may need to take advantage of Medicaid, a joint state and federal program designed to help low-income individuals and families. Unfortunately, if you need Medicaid and have assets, the law requires you to use up those assets in order to qualify for Medicaid nursing services.
Resources for medical cost planning
In the early stages of medical expense planning, online financial planning tools and other resources can help you start thinking about what you’ll need.
conclusion
It’s impossible to know what medical emergencies will arise after you retire. Age, health history, lifestyle, and genetic factors all play a role. “People are not born with a shelf life. You may not end up experiencing long-term medical problems, but if you do develop them, you will be compensated for them.” It should give you peace of mind knowing that you are prepared to pay for it,” Melone said.
You can protect yourself from unexpected medical costs in retirement by researching financial tools that can help you save on medical costs, such as savings accounts and long-term care insurance, and by consulting with a retirement financial expert.
