Health care can be one of the biggest expenses a person faces in retirement. A 65-year-old couple who retired in 2020 can expect to spend $295,000 in health care and medical expenses throughout retirement.

This doesn’t include the additional annual cost of long-term care, which in 2020 had a median costs of $105,852 for a private room in a nursing home, according to long-term care insurer Genworth.

Despite saving and preparing for retirement their entire working lives, many retirees aren't mentally or financially prepared for the high cost of medical expenses in retirement. Whether you're early on in your working career, close to retirement, or already making the transition out of the workforce, it's important to understand and plan for growing medical costs.

Key Takeaways

  • A 65-year-old retired couple in 2020 will need $295,000 for medical expenses in retirement.
  • Medicare may pay for some health care spending in retirement but does not fully cover all of it.
  • HSA funds and long-term care insurance can help consumers prepare for these 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 cost of your expenses.

Only 51% of adults age 60 and over believe that their retirement savings are on track. On average, those 65 and older spend $4,238 per month. However, in 2021 Social Security only pays a maximum monthly benefit of $3,148 for those who retire at full retirement age.

In 2022, the maximum monthly Social Security benefit is increasing to $3,345 for those who start collecting at full retirement age.

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. And benefits are subject to annual cost-of-living adjustments (COLAs)—increases to keep up with inflation—too.

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. But it can pay for some health care spending in retirement, but with limitations, according to Michael Gerstman, founder, financial advisor, and chief executive officer (CEO) 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. 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 2021, the standard deductible for Medicare Part A is $1,484. The standard monthly premium for Part B is $148.50, although some Medicare beneficiaries will pay more. The Part B annual deductible for 2021 is calculated at $203. Plan premiums for Part D vary by income, but the average 2022 premium for Part D coverage is estimated to be $33 per month, compared to $31.47 in 2021.

Medicare Advantage plans are offered through private insurers who are Medicare-approved. These plans generally cover the same costs that original Medicare does, along with Part D prescription drug coverage. Depending on the insurer and what the policy covers, one could pay less for a Medicare Advantage plan. Some plans may also extend coverage to include costs associated with vision, dental, and hearing.

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,” Wilkins says.

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,” Wilkins says. “Many employers will contribute cash rewards to an HSA for preventative screenings such as mammograms or annual physicals.”

For 2021, the regular HSA contribution limit is $3,600 for individual coverage ($3,650 in 2022) and $7,200 for family coverage ($7,300 in 2022). These limits apply to both employee and employer contributions combined. Keep in mind that those enrolled in Medicare can no longer make new contributions to an HSA.

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.

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,” according to Gerstman. 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 those costs and creating a strategy for spending can help preserve more of your retirement assets for other expenses.