When saving for retirement, we often dream about all the things we’ll be able to do with that money—traveling, going out to eat, maybe trying new hobbies. But the reality is that there are also everyday household expenses that you should account for in your post-retirement budget. Less fun … but equally important.
One budget line that doesn’t always get enough attention is healthcare.
If you think your potential healthcare costs in retirement will be similar to what you paid in your pre-retirement years, think again. Fidelity’s annual study found that the average 65-year-old couple retiring in 2025 will need $345,000 saved to cover their healthcare expenses throughout retirement.1 It’s a number that just keeps rising, too. This estimate is up nearly 5% from the previous year’s study. Oh, and this number doesn’t account for things like over-the-counter medications, dental care, or long-term care costs.
In other words, healthcare may be the single biggest purchase you make in retirement.
Whether your retirement is still years away or you’re already retired, there are things you can do now that may help you pay for this major expense. Let’s dig into some ideas.
Ways to Start Planning Early for Retirement Healthcare Costs
Let’s start with the obvious: savings plans. Purpose-specific accounts, such as health savings accounts (HSAs), often have built-in tax incentives that can make them a worthwhile option. In some cases, HSAs can offer a triple tax advantage—federal tax deductions for contributions, tax deferral during the accumulation period, and tax-free distributions for qualified healthcare expenses. HSA contribution deductions are also available in many states with state income tax, but not all. Check the tax laws for where you live.
Another option is adding insurance coverage that can help pay for some of the more significant health events. Before going down this path, it’s important to ask yourself what you’re trying to protect against. Here are two of the more standard coverage options that people can choose from:
- Critical Illness Coverage – Standalone critical illness policies can provide lump-sum or itemized benefits for medical issues such as cancer, heart attack, or stroke. Additionally, some life insurance policies have optional riders that can be added to help cover for these conditions or events.
- Extended Care or Long-term Care Coverage – Insuring for an extended care event or for long-term care can be done in several ways, including standalone policies and policy riders on life insurance or annuity contracts. With insurance companies making regular changes to these policies and how benefits are paid out, it’s important to work with a local, independent insurance advisor who can help you find the best options for your situation.
Finally, certain retirement accounts like Roth IRAs and 401(k)s may also have features that allow penalty-free withdrawals for qualified medical expenses. However, depending on how contributions were treated, distributions may still be taxed on the way out.
What to Do When You’re Nearing Retirement
As you prepare to leave the workforce, it’s important to get a handle on all of your expenses—including which health insurance options are available to you. Are you eligible for Medicare, or do you need to buy coverage in the marketplace? (Hint: Take a look at your most recent paystub and consider your employer’s healthcare subsidy. It might surprise you!)
Additionally, have you thought about any procedures you might want to have done while you still have employer-provided coverage? Planning out these healthcare expenses could be a great way to reduce healthcare costs post-retirement.
If you’re retiring before 65, you probably won’t be eligible for Medicare yet, so you’ll want to figure out how to get coverage in the meantime. Some early retirees are lucky enough to be covered under their previous employer. Others may find part-time employers who will help to subsidize healthcare costs. Additional options may include health sharing plans or co-op plans, self-insuring, or even moving abroad.
As you approach Medicare open enrollment, maybe 6–12 months out, you can start working with a trusted and independent Medicare professional. Be sure to choose someone familiar with the plans in your state. If you’re a snowbird, be sure to ask about each of the states you plan to reside in, as coverage needs can change from state to state.
You’ll need to make some decisions about which coverage you want. You can choose between Original Medicare (Part A and Part B) or Medicare Advantage (Part C). You should also determine whether you want to purchase dental, vision, or long-term care insurance coverage. Be sure to look at how all these plans work together and determine your maximum out-of-pocket costs. Then, you can build those costs into your retirement planning.
Steps to Take in Retirement
The first step you can take in retirement is signing up for Medicare on time. You will have a 7-month initial enrollment window—the three months before the month of your 65th birthday, your birthday month, and the full three months after that. Make sure you complete your enrollment during that window to avoid a penalty on your Part B premiums that will stay with you as long as you have Medicare. That unexpected cost can really add up! (Need some extra help determining when you should sign up? We’ve got a flowchart to help you out.)
Once you’re enrolled in Medicare, you want to make sure your premiums are as low as they can be and that the coverage you have still meets your needs.
If you pay more for Part B coverage because of the income-related monthly adjustment amount (known as IRMAA, an additional charge for higher-income individuals), you could potentially lower future monthly premiums by lowering your taxable income through charitable donations, retirement plan contributions, timing your capital gains, and other strategies. You can also ask for an exception if you’ve experienced a recent life-changing event that has affected your income. Examples include divorce, death of a spouse, or loss of work.
To help ensure you have the right coverage for your current situation, take a look at your Medicare insurance every year. You have the opportunity to review your Part C and Part D coverage annually, as enrollment for these plans must be done each year. Use this opportunity to make sure what you are paying for still makes sense.
Preparing for the Unknown
Healthcare costs can be unpredictable in retirement. Once you’ve retired, you can only hope that all your careful preparations will meet your needs. But the one constant in life is unpredictability.
Your financial advisor can work with you at whatever stage you’re in to help you feel more prepared for those unexpected expenses that can pop up. If you don’t already have an advisor, we can help you find one in your area.
Matt Lewis is a non-registered associate of Cetera Wealth Services LLC.
A Roth IRA offers tax-free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 1/2 or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.
1 “How to plan for rising health care costs.” Fidelity, 12 August 2024. https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs
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