How to Prepare for Health Care Costs in Retirement

How to Prepare for Health Care Costs in Retirement

Growing older isn’t fun. Neither are medical bills piling up during retirement. But there are ways that you can enjoy life to the fullest at any age.

One of the best ways is to ensure that you can afford medical care to keep you feeling your best, doing what you love, and providing long-term care should you need that type of assistance.

In 2020, the average 65-year-old couple needed $295,000 after taxes to cover medical expenses in retirement. The annual cost breakdown is currently $12,286 for people aged between 65 and 74.

If this bleak estimate alarms you, there are several concrete methods to prepare for health care costs in retirement that you can start today.

Due to rising healthcare costs, many people worry about paying for health care once they quit jobs with employer benefits. While Medicare covers some, don’t count on it to cover all expenses.

Whether you’re 35, 55, or 65, it’s not too late to take control. Here are four ways (plus some bonus ideas) to prepare for a retirement future that doesn’t involve mountains of medical debt.

Here’s what future retirement health care costs look like

If you are like most Americans, you probably plan to retire. Compared to previous generations, the average retirement age comes earlier today at 62. If you retire at 62, there’s a 3-year gap before you’re eligible to enroll in Medicare.

Unlike earlier generations who could rely on solid employer pensions and health care benefits in retirement, this type of employer-funded financial stability has a unicorn-like rarity today. While some organizations such as United States government jobs still offer pensions, this is not an option that most of us can count on to fund our retirement health care costs.

It can feel overwhelming to prepare for costs that rise faster than inflation.

Only 51% of people aged 54-65 think that their retirement savings are on track to provide them with a stable life that includes medical coverage.

Medical care remains of the biggest retirement expenses. It’s also an expense for which many don’t feel prepared.

According to the U. S. Department of Health and Human Services, a whopping 70% of Americans will require long-term care. If you’re like many Americans, you want to know practical ways to save right now so that you don’t experience financial stress due to mounting medical bills.

Cost of Care

So, how much do you need to cover retirement health care costs?

Based on the $295,000 total estimated health care figure, the five-year projection jumps from $13,000 in annual medical expenses at age 65 to $34,268 per year by age 85. That means that 15% of your retirement expenses will go towards health care costs.

In general, before age 65, you can plan to spend around $850-$1,150 per month (or around $10,200-$13,800 per year) on medical care. Once Medicare benefits start at 65, this number decreases to $450-$600 per month (or about $5,400-$7,200 annually).

You might wonder exactly where this money is going. For a start, nursing facilities and in-home aides (if you value your independence) don’t come cheap.

According to the Genworth Cost of Care national averages survey, a private nursing home room costs $8,821.00. A home nursing aid costs around half of that at $4,576.00.

Of course, the actual numbers will depend on your health, longevity, and type of long-term care needs. The good news is that the better your overall health heading into retirement, the lower your health care costs. The flip side of the coin is that the longer and healthier a life that you lead, the more funds you’ll need for the rest of your life.

Despite these disturbing figures, the great news is that you don’t have to spend your hard-earned nest egg to pay for medical care in old age.  

Integrate Health Care Expenses into Your Retirement Budget

Although it’s always smart to take advantage of employer retirement plans, it’s a good idea to look beyond retirement savings to prepare for future health care.

Calculate how much money you will have coming in each month during retirement and balance this against your expenses.

There is a shortfall between the $3,011 maximum monthly Social Security benefits received by retirement age individuals and the average $4,238 spent per month by people age 65 and older. 

Keep in mind that Social Security is not intended as the main source for retirement funds. In fact, Social Security only substitutes about 40% of pre-retirement income.

This does not include the estimated $13,000 per year in health care costs before you reach age 65. Nevertheless, be sure to check out any Social Security bonuses for which you might be eligible.

1.    Maximize your eligible medicare coverage

If you receive Social Security benefits, you will automatically be enrolled in Medicare Part A and B once you turn 65. You can add Part D to ensure that you have prescription coverage.

Like Social Security, Medicare won’t offer much coverage in retirement. While Medicare won’t cover long-term care, it can pay for some medical costs. It’s a good idea to get the details about what your particular Medicare plan does and does not cover.

For instance, unless you have a Part D prescription policy, Medicare will not cover any of your medications. If you have an Original Medicare plan, also called Parts A and B, then you won’t have any Medicare dental or vision coverage.

If you have a Medicare Advantage plan, you can visit the dentist or optometrist with more confidence since these benefits are usually covered with the Advantage plan. Depending on your coverage, you might pay less for an Advantage than an Original plan.

Keep in mind that there will likely still be premiums, deductibles, or other out-of-pocket costs that you will want to include in your retirement health care budget.

Here’s a breakdown for Medicare Part A, B, and Medicare Advantage plans deductibles and premiums for 2021.

Medicare Part ADeductible: $1,484.00  
Medicare Part BPremium: $148.50 per month or $1,782.00 per year.   Deductible: $203.00.   This is a standard cost, although some Medicare beneficiaries may need to pay more.  
Medicare Part DThese plan premiums depend on income, so it’s best to check with your provider to get some hard numbers.  

2.    Contribute to an HSA 

One of the top ways for pre-retirees to save for retirement health care costs is to open a health savings account (HSA) and start socking away money.

If you have not already enrolled in Medicare and meet the eligibility requirements, an HSA account is a smart way to create a retirement safety net.

What is an HSA?

A Health Savings Account is a fund account with tax advantages designed for people who have insurance coverage via high-deductible health plans (HDHPs).

The most common and easiest way to fund an HSA is through regular employee or employer contributions. While your contributions to an HSA have an annual cap, there are multiple benefits that you may want to consider.

One of the best things about an HSA is that contributed funds can cover qualified medical, dental, vision, or prescription medication costs that are not covered under an HDHPs.

Since HSA accounts belong to individuals, you can open one of these whether you are currently employed or not. This means that you can use your personal sayings, unemployment benefits, or dividend income to fund an HSA account.

Requirements for HSA eligibility

  • You need to be covered by a qualified, high-deductible health plan (HDHP) on the first day of the month to be eligible for an HSA account.
  • You don’t have any health care coverage that is not allowed by the IRS.
  • You aren’t enrolled in Medicare, TRICARE, or TRICARE for Life benefits.
  • You aren’t claimed as a dependent on another person’s tax return.

HSA benefits 

  • Tax-deductible contributions.
  • Tax-deferred growth.
  • Tax-free withdrawals for federal and state taxes if used for eligible medical costs.
  • Funds can cover specific medical premiums, including Medicare and long-term care insurance premiums.

Even if you’re in your fifties, you can take advantage of HSA plans through employer contributions and catch-up contributions.

If you’re 55 or older, you can throw in catch-up contributions totaling $1,000 annually on top of your maximum contribution limit.

For 2021, you can contribute up to $3,600 (unless you’re 55 or older) to an individual account or $7,200 for your family’s coverage.

This can help you save up faster for retirement medical costs. A bonus? Many employers also contribute cash rewards to an HSA fund to cover costs for necessary preventative mammogram screenings or yearly physical exams.

You can set up and take advantage of the extra savings and flexibility that an HSA can offer towards retirement health care costs by setting up an account before enrolling in Medicare.

Once you enroll in Medicare, you will become ineligible to set up an HSA account or make new contributions to an existing HSA.

3.    Buy a stand-alone dental insurance plan

If your Medicare plan does not include dental, vision, or hearing coverage, you can opt for a stand-alone dental health plan.

These plans focus on covering the types of procedures that seniors may require. This can include dentures, crowns, root canals, and tooth replacements.

4.    Look into long-term care insurance

Since Medicare or private insurance are unlikely to fill the gap in retirement health care expenses, buying long-term care insurance is another way to take care of yourself and/or your spouse in retirement.

With a long-term care insurance policy, you can choose to pay a premium each month for a specific amount of time, typically between two to five years, or you can create a lifetime plan.


Long-term health insurance has monthly premiums.


Not everyone might be able to afford these kinds of premiums each month.

If that’s your situation, you can also add a long-term care option to an LTC life insurance policy purchase. The earlier you purchase long-term care insurance or life insurance, the lower the expected premium cost.

Additional ways to prepare for retirement health care costs

  • Keep working longer, start a side hustle, or work a part-time job in retirement.
  • If you are a government employee, check out federal retirement benefits and pension options.
  • Make the savvy choice to move to a different state where health care costs are lower.

The Bottom Line

Rising health care costs can quickly eat up your retirement budget, but you don’t have to let it. Plan how you will handle long-term care.

Is it an assisted living facility or in-home help? Use your plan on a budget basis to calculate expenses and coverage.

Invest your pre-tax dollars in an HSA and allow it to grow. Consider a stand-alone insurance plan or check out long-term care or life insurance options to make your money work for you in retirement in the best way possible.

By calculating those expected costs, understanding your Medicare benefits, stashing HSA funds, or buying a long-term policy, you can create a strategic financial plan to better prepare for rising health care costs in retirement.

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