How to Plan for Medical Expenses in Retirement

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Matthew Etter, CFP®

Partner, President
Signet Financial Management
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Daniel DiVizio, CFP®, CRC®

Financial Planning Director, Wealth Management
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Health care can be one of the biggest expenses a person faces in retirement. A typical retired couple age 65 in 2022 can expect subsequent medical expenses of $315,000, according to the annual Fidelity Investments Retiree Health Care Cost Estimate.

This sum doesn’t include the additional cost of long-term care, over-the-counter medications, or most dental services.(1) The cost of long-term care in particular can be steep: In 2021, a private room in a nursing home had a median annual cost of $106,920, according to long-term care insurer Genworth.(2)


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KEY TAKEAWAYS

  • A typical 65-year-old retired couple in 2022 faces an estimated $315,000 in subsequent health care costs, not including dental work or long-term care.
  • Medicare may pay for some health care in retirement but does not fully cover all of it.
  • HSA funds and long-term care insurance can help consumers prepare for these costs.

Many people aren't mentally or financially prepared for the high cost of health care in retirement. Whether you're early on in your career, close to retirement, or already making the transition out of the workforce, it's important to understand and plan for growing medical costs.

Fitting Health Care Into a Retirement Budget

Your overall retirement budget depends on two things: How much money will be coming in each month and the total of your expenses.

Only 51% of adults age 60 and over believe that their retirement savings are on track.(3) On average, those 65 and older spend $4,185 per month.(4) However, in 2022, Social Security only paid a maximum monthly benefit of $3,345 to those who retired at full retirement age.(5)


Important: Social Security benefits are subject to annual cost-of-living adjustments (COLAs)—increases to keep up with inflation.


Of course, it's important to recognize that Social Security is only meant to supplement retirement savings: The Social Security Administration (SSA) reports that Social Security replaces an average of 40% of pre-retirement income.(6)

The point remains, though, you're probably going to have to look beyond Social Security and into other sources to cover medical expenses. How much retirement income to budget for health care depends largely on your age and overall health. “The healthier we are going into retirement typically means that less money will be allocated toward health care expenses,” says Chris Schaefer, head of the retirement plan practice at MV Financial. “The other side of that coin is that with a healthier lifestyle, life expectancy will be longer and, therefore, retirees need to plan for a longer time in retirement.”

What Medicare Covers (and Doesn't Cover)

Medicare does not cover long-term care.(7) The program will cover some health care costs in retirement, but with limitations, according to Michael Gerstman, founder and financial advisor of Gerstman Financial Group. “For example, without a Part D prescription drug policy, Medicare does not cover medications.”

Original Medicare plans, also referred to as Parts A and B, don’t cover dental and vision care, but Medicare Advantage plans typically do.(8) If you plan to rely on Medicare to help cover medical expenses in retirement, you'll need to budget for deductibles, premiums, and other out-of-pocket costs.

For 2023, the inpatient hospital deductible for Medicare Part A (which covers hospital stays and procedures) is $1,600, rising from $1,556 in 2022. The standard monthly premium for Part B (which covers doctor visits and outpatient treatments) is $164.90, a decrease from $170.10 in 2022—although some Medicare beneficiaries will pay more, depending on their adjusted gross income. The Part B annual deductible for 2023 is $226, down from $233 in 2022.(9)

Plan premiums for Part D vary by income, but the average basic 2023 premium for standard Part D coverage is estimated at $31.50 per month, a drop from $32.08 in 2022.(10,11)

Private insurers approved by Medicare offer Medicare Advantage plans. These plans generally cover the same costs as Medicare, and provide the Part D prescription drug benefit.(12) Depending on the insurer and what the policy covers, one could pay less for a Medicare Advantage plan than Original Medicare. Some plans may also extend coverage to include costs associated with vision, dental, and hearing.(13)

If you do not have coverage for dental expenses via Medicare Advantage, you may also consider a standalone dental insurance plan. Many plans focus on the types of coverage seniors may need, including crowns, root canals, dentures, and tooth replacements.

Look Beyond Retirement Savings to Pay for Health Care

Climbing health care costs don’t have to drain your nest egg. There are two ways pre-retirees can create a safety net for health care spending in retirement.

Health Savings Account (HSA)

If you're not yet enrolled in Medicare, you can save money for retirement health care costs with a health savings account (HSA). These are available with high-deductible health plans (HDHPs) and offer triple tax advantages:

  • Deductible contributions
  • Tax-deferred growth
  • Tax-free withdrawals for qualified medical expenses

HSA funds can be used to pay for certain medical premiums, including Medicare premiums and long-term care insurance premiums.

Those already in their 50s can still maximize these plans by taking advantage of catch-up contributions and employer contributions. Individuals 55 or older can make a catch-up contribution of $1,000 per year in addition to the maximum contribution limit. You can use your HSA for preventative screenings such as mammograms or annual physicals covered by your HDHP.(14)

For 2022, the regular HSA deduction limit was $3,650 for individual coverage and $7,300 for family coverage.(15) These limits apply to the employee and employer contributions combined. Keep in mind that those enrolled in Medicare can no longer make new contributions to an HSA.(16)

Long-Term Care Insurance

Purchasing long-term care insurance is another way to fill the gap left by Medicare. This type of policy can pay a monthly benefit toward long-term care for either a specified amount of time (usually between two and five years) or for the remainder of your lifetime.(17)

Long-term care insurance premiums may not be affordable for everyone. Gerstman says an alternative is buying a life insurance policy that has the option of adding a long-term care insurance rider. “This allows younger people to get ahead in their long-term care planning,” Gerstman says. That's because the sooner one buys life or long-term care insurance, the lower the premiums likely would be.

The Bottom Line

Health care spending can easily account for a big share of a retirement budget. Estimating these costs and creating a strategy for spending can help preserve more of your retirement assets for other expenses.


Article Sources:

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  1. Fidelity Brokerage Services, LLC. "How to Plan for Rising Health Care Costs."
  2. Genworth Financial. "Cost of Care Trends & Insights."
  3. Board of Governors of the Federal Reserve System. "Report on the Economic Well-Being of U.S. Households in 2019, Featuring Supplemental Data From April 2020," Page 51.
  4. U.S. Bureau of Labor Statistics. "Consumer Expenditures in 2019," Page 18.
  5. Social Security Administration. "2022 Social Security Changes, Cost-of-Living Adjustment (COLA)."
  6. Social Security Administration. "Learn About Retirement Benefits."
  7. U.S. Centers for Medicare and Medicaid Services. "Long-Term Care."
  8. U.S. Centers for Medicare and Medicaid Services. "Your Medicare Coverage Choices."
  9. U.S. Centers for Medicare & Medicaid Services. "2023 Medicare Parts A & B Premiums and Deductibles, 2023 Medicare Part D Income-Related Monthly Adjustment Amounts."
  10. U.S. Centers for Medicare & Medicaid Services. "CMS Releases 2023 Projected Medicare Basic Part D Average Premium."
  11. U.S. Centers for Medicare and Medicaid Services. "Medicare Costs at a Glance."
  12. U.S. Centers for Medicare and Medicaid Services. "Medicare Advantage Plans."
  13. U.S. Centers for Medicare and Medicaid Services. "Things to Know About Medicare Advantage Plans."
  14. Internal Revenue Service. "Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans," Pages 3, 6, 7.
  15. Internal Revenue Service. "26 CFR 601.602: Tax Forms and Instructions, Rev. Proc. 2021-25," Page 1.
  16. Internal Revenue Service. "Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans," Page 5.
  17. The Administration for Community Living. "What Is Long-term Care Insurance?"

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Matthew Etter profile photo

Matthew Etter, CFP®

Partner, President
Signet Financial Management
Daniel DiVizio profile photo

Daniel DiVizio, CFP®, CRC®

Financial Planning Director, Wealth Management
Contact Now