Health Care Costs in Retirement
Many people picture retirement as a time for travel, hobbies, and spoiling grandchildren. While those goals are important, overlooking health care can leave a major gap in your retirement budget. According to Fidelity’s annual estimate, a 65‑year‑old couple retiring in 2018 needed about $280,000 in today’s dollars to cover medical expenses throughout retirement. That figure does not include long‑term care.
Breaking down the $280,000, Medicare premiums account for roughly 35 % ($98,000). Co‑payments, coinsurance, and deductibles make up another 45 %, and prescription drugs represent the remaining 20 %.
Understanding Medicare Coverage
Even though most retirees qualify for Medicare, the program does not cover everything, and its costs can add up quickly.
Medicare Part A
Part A (hospital insurance) carries no monthly premium for most enrollees, but it only pays for inpatient hospital stays, skilled‑nursing‑facility care, home health care, and hospice. You still face a deductible of $1,340 per benefit period (2018 rate) and coinsurance of $335 per day after 60 days in a hospital, or $167.50 per day after 20 days in a skilled‑nursing facility.
Medicare Part B
Part B works like traditional health insurance. The standard monthly premium in 2018 was $134 (higher‑income beneficiaries may pay more). After meeting the yearly deductible of $183, you generally pay 20 % of the Medicare‑approved amount for doctor services, outpatient therapy, and durable medical equipment. Part B does not cover long‑term care, prescription drugs, routine dental or vision care, dentures, hearing aids, or routine foot care.
Strategies to Prepare for Retirement Health Care
While the numbers can seem daunting, there are practical steps you can take now to protect your retirement savings from unexpected medical costs.
Prioritize Your Health
Adequate sleep, regular exercise, and a balanced diet are not just wellness tips—they can reduce the likelihood of chronic conditions and lower future medical spending. Even small improvements in daily habits can pay off over the long term.
Consider Long‑Term Care Insurance
Medicare and most private health plans do not pay for long‑term care, which includes help with bathing, dressing, eating, and mobility. The Department of Health and Human Services estimates that a 65‑year‑old today has a 70 % chance of needing some form of long‑term care later in life.
A long‑term care policy can fill this gap. For a 60‑year‑old couple, annual premiums typically range from $2,700 to $5,600 for a benefit of $150 per day over three years. This type of insurance works best for retirees with a moderate nest egg; others may rely on Medicaid after spending down assets.
Use a Health Savings Account (HSA)
If you are enrolled in a high‑deductible health plan, an HSA lets you set aside pretax money for qualified medical expenses. In 2018 the contribution limits were $3,450 for individuals and $6,900 for families, with an extra $1,000 catch‑up contribution if you are 55 or older. Funds grow tax‑deferred and withdrawals for medical costs are tax‑free.
To qualify, your plan must have a deductible of at least $1,350 (individual) or $2,700 (family) and an out‑of‑pocket maximum no higher than $6,650 (individual) or $13,300 (family). After age 65 you can also use HSA funds for non‑medical expenses without penalty, though those withdrawals are taxable.
Save with a Roth IRA
A Roth IRA offers another tax‑efficient way to earmark money for retirement health care. You contribute after‑tax dollars; earnings grow tax‑free, and qualified withdrawals after age 59½ and a five‑year holding period are tax‑free. In 2018 the contribution limit was $5,500 per year, with an additional $1,000 catch‑up for savers aged 50 or older.
You can tailor the account’s investment mix to your health outlook. If you expect to stay healthy for many years, a growth‑oriented portfolio may be appropriate. If you have existing chronic conditions or a family history of illness, a more conservative allocation might reduce risk.
The Bottom Line
Health care is likely to be one of the largest expenses in retirement, but it does not have to derail your financial plans. By understanding what Medicare covers—and where it falls short—and by taking proactive steps such as maintaining good health, evaluating long‑term care insurance, using an HSA, and saving in a Roth IRA, you can build a resilient budget that supports both your lifestyle and your medical needs as you age.
