Guide to Health Care in Retirement

NP
By Nathan Paulus
Edited by Rae Osborn

Updated: November 1, 2024

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Planning for health care costs in retirement helps retirees ensure financial stability in their golden years. The Fidelity Retiree Health Care Cost Estimate indicates that a single 65-year-old in 2023 might need about $157,500, after taxes, to cover health care expenses in retirement, while a retired couple of the same age might need around $315,000.

Although Medicare provides foundational coverage, it doesn't cover everything. Beneficiaries often must pay significant out-of-pocket expenses for prescriptions, dental, vision and long-term care services. Moreover, the significant but often-overlooked costs of long-term care add to the financial burden. Retirees can ensure they have the means to cover medical needs, afford necessary medications and manage potential long-term care situations by preparing for health care expenses ahead of time.

Common Health Care Expenses for Retirees

Understanding the variety of health care expenses that may arise as you age can help you secure comprehensive retirement planning. By being aware of these potential costs and incorporating them into your budgeting process, you can develop a more effective strategy ensuring financial stability and access to necessary care.

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    Routine Medical Care

    These expenses encompass regular doctor visits for check-ups, screenings and vaccinations, which are essential for maintaining health. They often include copayments and costs for services not covered by Medicare.

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    Prescription Medications

    A significant part of ongoing health care costs, prescription medications, especially for chronic conditions, can vary widely in price. While Medicare Part D offers coverage, the associated premiums, deductibles and the infamous coverage gap ("donut hole") can significantly impact your budget. Anticipating these costs allows for more accurate financial planning and prevents medication expenses from becoming a financial burden.

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    Long-Term Care

    Long-term care expenses cover services like nursing home care or home health assistance, which Medicare does not typically cover. With approximately 70% of individuals over 65 requiring some form of long-term care, as reported by the U.S. Department of Health and Human Services and assisted living costs averaging $64,200 annually, these expenses require thorough planning.

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    Unexpected Health Emergencies

    Emergency medical situations can incur substantial unanticipated costs. Such events emphasize the need for a solid emergency fund and comprehensive insurance to mitigate the financial impact.

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    Dental, Vision and Hearing Services

    Retirees often find out too late that Medicare does not typically cover dental care, eyeglasses or hearing aids. These out-of-pocket expenses can be substantial, particularly for major treatments or devices. Considering supplemental insurance or allocating funds for these services can prevent them from becoming significant financial burdens.

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    Insurance Premiums and Copayments

    Planning for retirement health care is not just about direct medical costs but also involves budgeting for Medicare premiums, copayments, deductibles and any supplemental or long-term care insurance premiums.

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    Travel Expenses Related to Medical Care:

    For those in rural areas or requiring specialized treatment, travel costs for medical care can add up, including transportation, accommodation and meals away from home during treatment. Factor these expenses into your health care budget.

Factors Influencing Health Care Costs in Retirement

The cost of health care in retirement can fluctuate widely and is subject to various factors. This requires retirees to plan carefully to ensure they are financially prepared. The amount you'll need will be determined by when and where you retire, as well as your health and your life expectancy. The types of accounts you use to pay for health care — such as HSAs, 401(k)s or IRAs — will also impact how much you need to budget for these expenses.

The common factors that can significantly influence health care costs in retirement include:

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    Age

    As you age, your need for health care services typically increases, making age a critical factor in health care spending. Aging is associated with a higher risk of chronic diseases and conditions, which can lead to a rise in health care expenses.

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    Health Status

    Pre-existing medical conditions and general health also heavily influence health care costs. Those with chronic illnesses or ongoing health issues are likely to face higher health care costs compared to those who are in good health.

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    Location

    Your place of residency or location can also impact health care costs due to the variation in the price of medical services between regions. Some areas have higher medical expenses due to the cost of living, access to medical services and demand for health care services.

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    Ways to Pay

    The strategies and accounts you use to fund health care in retirement can have a notable impact on your finances. Choosing the right mix of accounts for health care costs can lead to significant tax savings and financial efficiency.

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    Income

    Your retirement income plays a dual role, affecting your lifestyle and specific health care costs, such as Medicare premiums. Higher earners may face increased premiums through the Medicare income-related monthly adjustment amount (IRMAA). Additionally, your income can affect eligibility for aid programs, further influencing your health care cost strategy.

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    Retirement Timing

    Whether you plan to retire at 65, before 65 or after 65 should be considered when anticipating health care costs in retirement. For example, retiring before you become eligible for Medicare may mean paying more out of pocket.

Timing Your Retirement

Medicare often becomes your primary health care option when you retire, but for most people it’s only available at age 65. If you retire before 65, you’ll need alternative coverage to bridge the gap. Other Medicare-related considerations depend on your retirement timing. Here are strategies to help you navigate Medicare coverage based on when you will retire:

  1. 1
    Retiring Before 65

    If you plan to retire before 65, you’ll need to explore alternative health care coverage options to bridge the gap until you become eligible for Medicare. Consider:

    • Continuing employer coverage through COBRA
    • Enrolling in a spouse’s health plan
    • Using the public health insurance marketplace
    • Securing private insurance
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    Retiring at 65

    Medicare becomes your primary health care option at 65. Before you officially retire, take time to learn about its components — including Parts A, B, D, Medicare Advantage and Medigap plans. Medicare offers flexibility, allowing you to switch plans as your needs change. Enroll during the initial seven-month period around your 65th birthday to avoid late penalties.

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    Continuing to Work After 65

    If you or your spouse continue working past 65 and have health benefits through an employer, you can delay enrolling in Medicare without penalty. You can use a special enrollment period (SEP) to sign up for Medicare Part A and Part B, which begins the month after your initial enrollment period ends and lasts for eight months after your employment or group health coverage ends, whichever comes first. Failing to enroll during this SEP means you must wait for the next general enrollment period and possibly incur a monthly late enrollment penalty.

How to Pay for Health Care in Retirement

Retirees can leverage their insurance coverage and use their tax-advantaged accounts to manage and pay for their health care. With this information, you can confidently cover health care costs throughout your retirement.

Insurance Options for Health Care in Retirement

As retirees navigate their health care needs, they may encounter various health insurance options designed to cover different aspects of health care costs. These insurance solutions offer distinct benefits and coverages tailored to the diverse needs of retirees.

Contact your State Health Insurance Assistance Program (SHIP) for personalized assistance. SHIP offers access to trained insurance counselors who provide accurate, objective information on public and private health insurance options available to older adults. This includes insights into Medicare and Medicaid benefits, Medicare Advantage and Supplement Plans and state-sponsored prescription assistance programs.

Medicare

Medicare serves as a fundamental health insurance program for individuals 65 and older, providing significant support for hospital and medical expenses. Yet, it doesn't encompass all health-related costs in retirement, notably excluding services like long-term care and dental. These gaps often necessitate additional insurance plans to manage out-of-pocket expenses, which can accumulate over time.

  1. 1
    Medicare Part A: Hospital Insurance

    Medicare Part A provides inpatient hospitalization, skilled nursing facility care for up to 100 days, home health care and hospice care in the final six months of life. Most people do not pay a Part A premium because they have paid enough Medicare taxes while working. The deductible is $1,632 for each inpatient hospital benefit period and there is no yearly restriction on the number of benefit periods.

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    Medicare Part B: Medical Insurance

    Medicare Part B covers routine medical services and supplies, such as preventative care, ambulance services and mental health treatment. The normal monthly premium for Part B in 2023 is $164.90, with a monthly cost of $174.70 (or more, depending on income). Enrolling in Part B when first eligible will help avoid a monthly penalty.

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    Medicare Advantage: Part C

    Medicare Advantage, often known as Part C, is an alternative to standard Medicare that combines hospital, medical and, in many cases, prescription drug coverage. These plans, provided by private insurers approved by Medicare, may include extra benefits such as dental, vision and hearing care. Premiums and out-of-pocket expenses differ in each plan, with an annual limit on out-of-pocket spending.

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    Medicare Part D: Drug Coverage

    Medicare Part D covers prescription drugs, with premiums varying by plan and income. Enroll in a Medicare drug plan once you are eligible to avoid penalties for lapses in creditable drug coverage.

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    Medigap: Medicare Supplement Insurance

    Medigap plans are private plans that supplement Parts A and B by paying expenditures such as co-insurance, copayments and deductibles not covered by original Medicare. Medigap provides financial stability and protection against unexpected medical bills.

Long-Term Care Insurance

Long-term care insurance covers extended care services in settings like home care, assisted living or nursing homes — areas often not covered by Medicare or Medicaid. With Genworth's 2023 data indicating the median daily cost of a private nursing home room at $9,733 per month and a semi-private room at $8,669 per month, the financial impact of long-term care can be significant. Premiums for these policies can be high, so you should thoroughly understand the coverage provided.

Employer-Provided Insurance

Some employers offer retiree health coverage, continuing your pre-retirement benefits for a certain period or until Medicare eligibility. This can provide a valuable bridge to Medicare for many retirees.

Affordable Care Act (ACA) Marketplace

The ACA Marketplace offers an alternative to purchasing health insurance. Plans on these exchanges might be more affordable than options on the open market, with potential tax credits available for individuals below specific income levels.

COBRA Coverage

COBRA allows for continuing your employer's health plan, although it tends to be the priciest option due to the lack of employer subsidies. Coverage is generally available for up to 18 months post-employment, necessitating a transition plan for extended coverage needs.

Spousal Health Plan

Joining a spouse's employer-sponsored health plan can offer an economical way to secure coverage in early retirement. Additionally, if your spouse has retiree medical coverage, exploring the possibility of being added to their plan can offer further savings.

Tax-Advantaged Accounts for Health Care in Retirement

Retirees can strategically use various tax-advantaged accounts to manage retirement health care costs effectively. These accounts, such as Health Savings Accounts (HSAs) and 401(k) plans, allow for payment of qualifying health care expenses with pre-tax dollars, offering potential tax savings over time.

Health Savings Accounts (HSAs)

HSAs are designed for individuals with high-deductible health plans, offering a way to save for future health care costs. The benefits of HSAs extend into retirement, with three significant tax advantages:

  • Contributions are tax-deductible, reducing your taxable income.
  • Withdrawals for qualified medical expenses are tax-free.
  • Investment earnings in the account are not taxed.

In 2024, HSA contribution limits are $4,150 for self-coverage and $8,300 for family coverage, with an additional $1,000 catch-up contribution for those 55 and older. Unused funds roll over annually, allowing for growth over time.

401(k) Plans

401(k)s are standard tools for retirement savings, including health care expenses. Starting at age 59½, withdrawals are penalty-free, becoming even more flexible at age 65 for health care costs, including long-term care insurance premiums under certain conditions.

Individual Retirement Accounts (IRAs)

Traditional and Roth IRAs offer additional support for health care costs, allowing penalty-free withdrawals for medical expenses exceeding 7.5% of adjusted gross income. After age 65, the flexibility for using funds increases, aiding in covering Medicare gaps and other health care needs.

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TIPS TO REDUCE HEALTH CARE COSTS IN RETIREMENT

Retirees can reduce their health care expenses through several strategies:

  • Comparing Costs: Shop around for medical services and treatments to find savings.
  • Preventive Care: Regular check-ups and health screenings can prevent serious health issues, reducing long-term costs.
  • Telehealth: Utilize telehealth services for convenient and cost-effective consultations.

Crafting a Health Care Budget for Retirement

Budgeting for health care in retirement helps you cover medical expenses without sacrificing other retirement lifestyle aspects. Learning to navigate out-of-pocket health care costs can significantly improve your ability to maintain health care expenses during retirement under control.

  1. 1
    Assess Health Care Needs

    Begin by evaluating your health care requirements. Consider costs not entirely covered by Medicare, like a typical 3-day hospital stay or Part D prescription drug premiums. Analyze your health history against future medical needs, including regular doctor visits, medications and ongoing treatments.

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    Calculate Expected Expenses

    Account for predictable costs such as insurance premiums, which may vary with income and standard out-of-pocket expenses associated with your health plan. Factor in annual inflation rates impacting health care costs.

  3. 3
    Plan for the Unexpected

    Set aside funds for unanticipated health issues or emergencies in a separate savings account or as a contingency in your health care budget. Estimate the proportion of your retirement income allocated for health care, acknowledging it could represent a significant share.

  4. 4
    Establish an Emergency Health Care Fund

    Create an emergency fund for unexpected health care costs. This fund is a safety net for expenses surpassing anticipated amounts due to inflation or sudden medical needs.

  5. 5
    Consult a Financial Advisor

    A financial professional can provide insights into your projected health care costs and how to integrate them into your retirement planning.

  6. 6
    Adopt Flexible Budgets

    Design a budget that accommodates increasing costs, allowing for spending adjustments as required.

  7. 7
    Review and Adjust Regularly

    Given that health care needs and costs can evolve, periodically reassessing and updating your budget ensures you remain prepared.

Additional Resources

Understanding the ins and outs of health care costs in retirement doesn't have to be daunting. Numerous resources are available to assist you in planning effectively. Below are some valuable tools and websites to guide you through this process:

  • AARP Long-Term Care Costs Calculator: Provides personalized estimates of long-term care costs and types of service in your area.
  • HSA Center: Offers calculators for Health Savings Accounts, aiding in planning your contributions and forecasting savings.
  • LongTermCare.gov: A resource from the U.S. Department of Health and Human Services, this site offers comprehensive information on long-term care planning, including costs, services and insurance options.
  • National Council on Aging (NCOA): Offers extensive resources on health, economic security and living independently for older adults.
  • National Institute on Aging: Provides valuable research and information on aging, focusing on health issues and wellness strategies for older adults.
  • Social Security Administration: Details the impact of Medicare premiums on Social Security benefits, a crucial consideration for retirees.
  • The Senior Citizens League: Provides current updates and practical advice on navigating Medicare changes, Social Security benefits and cost-saving measures for older adults.
  • Combating Ageism in Health Care: Learn to recognize the signs of ageism, assert your rights and promote equitable care to combat age-based discrimination.

About Nathan Paulus

Nathan Paulus headshot

Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy.

Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.

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